Financial Watch

The initial Gross Domestic Product (GDP) report on first quarter economic growth in the United States will be released on Thursday. The report is expected to show that growth has moderated from the 4.4% pace we saw last year. At Economic-Watch, we expect to see growth during the first quarter of 3.2%. The recent slowdown in the economy should not be viewed with too much concern. So far in the business cycle, consumers have been the driving force behind strong growth by the way of tax cuts and a strong housing market. As the stimulus wears off, the business sector will increasingly be relied on to generate growth through new jobs and investment. With economic growth slowing and productivity leveling off, businesses will need to focus on revenue growth to improve profits.

The challenge ahead for the U.S. economy is sustaining enough momentum in the face of large imbalances. The large trade deficit weighs on growth as companies are able to gain a greater return by investing in plants outside of the United States and then importing goods into our nation. The nation’s savings rate is at an all-time low. Additionally, the housing market is nearing its peak. The headwinds facing the U.S. economy should slow GDP growth to less than 3% in the upcoming quarter.

Although the U.S. faces obstacles ahead, there are also several important factors favoring continued growth. Oil prices are bound to fall. Oil speculators will undoubtedly overreact to slowing economies in the United States and China. The trade deficit is approaching its peak. Inflated oil prices and expanded market access for Chinese textiles are responsible for much of the trade deficit’s growth during the past six months. Finally, the appetite for risk is slowing returning. Businesses are looking for ways to spend the hordes of cash that have flowed in during the past couple years. In time, this will provide fuel for stronger employment growth.