US GDP Grew by .1% hit by EM Contagion and Housing Downturn

“Thanks” to US government spending on “Obamacare”, which spared the US economy a negative growth rate, 1st quarter statistical GDP grew by a paltry .1%! [As a side note: Shouldn't record stocks be saying otherwise? Or more signs of redistribution from Main Street to Wall Street, thus the dichotomy or parallel universe?]

While the mainstream has attributed the substantial slowdown to “weather”, I have been saying that such represents a part of the unfolding periphery-to-the-core phenomenon of the global bubble cycle.

Last February I wrote

If emerging markets has been attributed by some as having pulled out the global economy from the recession of 2008, now will likely be the opposite dynamic, the ongoing mayhem in emerging markets are likely to weigh on the global economy and equally expose on the illusions of strength brought upon by credit inflation stoked by inflationist policies.

I have also pointed out in March signs of a material decline in growth rates of exports by many of the world’s major exporters would imply that the “world will be faced with a dramatic decline in the rate of growth” 

My observations of slowing exports seem to have been validated by the Wall Street Journal “Combined exports from Asia's four export powerhouses—China, Japan, South Korea and Taiwan—slid 2% in the first three months of this year from the same period last year.”

And this has not just been in Asia, as I recently posted  “global trade in early 2014 registered its “first negative reading since October 2012”.  

I also noted in the same post that in the US a 130 basis points hike in interest rates has impacted housing negatively that will likely have a spillover effect on the GDP.

And according to the US BEA data, finance, insurance, real estate and leasing accounts for the largest share of US GDP (in 2013 19.67% of Gross Value added) add construction’s share 3.6%, finance and housing accounts for one fifth of the statistical GDP. So a sustained slowdown in real estate industry will materially weigh on US GDP.

All these revealed in the US 1st Quarter GDP

Here is a summary of the “puny” .1% growth from the Wall Street Real Time Economics Blog: (bold mine, double asterisk mine)

Hey, Big Spender

Consumer spending accounts for more than two-thirds of U.S. economic output, and it rose at a seasonally adjusted annual rate of 3.3% in the fourth quarter. It slowed in the first quarter, but not much, growing at a 3% pace. Spending on goods slowed to a 0.4% pace, but spending on services – like health care and energy** – rose to a 4.4% pace. Personal consumption expenditures were the single biggest boost to economic output in the first three months of the year, and helped offset big drags on growth like trade.

Businesses Close Their Checkbooks

Spending by businesses was another story. Fixed nonresidential investment fell at a 2.1% rate in the first quarter after surging 7.3% in 2012 and rising a more modest 2.7% in 2013. Spending on equipment fell at an annual pace of 5.5% in the first quarter of 2014, the worst drop since the second quarter of 2009, after rising at a 10.9% pace in the fourth quarter of 2013.

Exports a Boost No More

Net trade subtracted 0.83 percentage point from GDP growth in the first quarter as exports lagged and the trade gap widened. Exports fell at a 7.6% pace, the most since the recession ended in 2009. Trade had been a big boost to economic output in the second half of 2013, contributing 0.14 percentage point in the third quarter and 0.99 percentage point in the fourth quarter. Stay tuned, though: Trade data from March will be released by the Commerce Department next Tuesday, which could lead to significant revisions in GDP.

Housing Hurting

The U.S. housing recovery’s slowdown was a drag on GDP in the first quarter. Residential fixed investment — spending on home building and improvements — pulled down GDP growth to the tune of 0.18 percentage point in the first quarter after contributing 0.33 percentage point to GDP growth for all of last year.

Inventories Drag

A big buildup in private inventories helped boost economic output in the third quarter last year to a 4.1% annual rate. In the first quarter of 2014, by contrast, slowing inventories subtracted 0.57 percentage point from GDP growth. A measure of GDP that strips out inventory changes, final sales of domestic product, grew at a 0.7% pace in the first quarter, down from its 2.7% pace in the fourth quarter.

**increase in energy spending has been due to energy “price inflation”
 
So we have a combo of weak consumer, a downturn in housing, capital spending and likewise in global trade which means a broad based slowdown that has been cushioned only by government spending in health services and energy spending via higher price inflation. Yet the forces that counterbalanced the fall in the statistical economic growth has their own respective costs that will billed to taxpayers and to US dollar holders in the future.

So the recent rise in interest rates (via higher bond yields) and the initial smack down on Emerging Markets by the same force, have both become significant factors in the US economic slowdown. Think of it, yields of 10 year treasuries have barely breached the 3% level yet we get all these signs of troubles. The 3% barrier has almost been reached in September and was touched last in December (see chart here) while today trades range bound between 2.6% and 2.8%. So for me, the 3% looks like a crucial threshold level indicative of the viability or serviceability of the critical mass of world debts denominated in US dollars. In short, the farther yields of US 10 year notes go beyond 3%, the greater the likelihood of chains of default. For now, events have been suggesting of a slow motion progression of internal entropy.

The US 1st quarter GDP should represent a red flag for emerging markets. Again as I wrote last February: (bold original)

if the adverse impact of emerging markets to the US and developed economies won’t be offset by growth (exports, bank assets and corporate profits) in developed nations or in frontier nations, then there will be a drag on the growth of developed economies, which would hardly be inconsequential. Why? Because the feedback loop from the sizeable developed economies will magnify on the downside trajectory of emerging market growth which again will ricochet back to developed economies and so forth. Such feedback mechanism is the essence of periphery-to-core dynamics which shows how economic and financial pathologies, like biological contemporaries, operate at the margins or by stages.

Contradictory forces of significantly slowing economic growth combined with the Federal Reserve’s continued tapering—the Fed cut monthly asset purchases to $45 billion at the April meeting—amidst  record (Dow Jones) stock market…looks like ingredients for the Wile E. Coyote moment.