Still tough going for the US

Forex News 

On the face of it, today's GDP numbers confirmed the US economy ended last year on a decent footing (up 2.8% on annualised basis), even though growth fell short of expectations. However, the pattern of growth was perhaps a little more concerning. Inventory accumulation accounted for nearly three-quarters of the increase in output. Meanwhile, government consumption took nearly 1% from headline growth, with net exports also detracting, although only a small 0.1% negative contribution. The extent of the inventory correction and (less so) disappointment with the level of consumption suggests that the US will struggle to maintain this level of output in the first quarter. This view is also backed up by the fact that savings were again run down in the fourth quarter in order to achieve this consumption growth. Not a healthy pattern for a sector that still needs to deleverage.

The Fed has to a fair degree anticipated this, with its extension of the timeline for which it sees rates at zero (from mid-2013 to the end of 2014) and hints that more quantitative easing may well be on the way. As we pointed out earlier this week, this activism sits in strong contrast to the relative inertia at the ECB, even though most believe the eurozone is heading for a recession. The Fed recognises that the balance sheet adjustment in the household sector is ongoing and as such, whilst the numbers look good on a relative basis, there's little room for complacency regarding the outlook for this year. The dollar is understandably softer on the release, adding to the 2.7% decline seen on the dollar index from the peaks of earlier this month.