Analysts, economists, investors, and Americans in general were surprised at Wednesday’s gross domestic product estimate that showed growth of .6 percent for the US economy during the first quarter of 2008. This was slightly better than the general consensus, and surprised some analysts who believed the economy might have contracted, indicating possible recession, during the quarter.

Wednesday also saw another Fed funds rate cut of one quarter point, which reduced the fund rate to two percent. Many Americans have benefited greatly from lower interest on credit cards and equity loans. Many home equity loans are operating at below 5 percent interest at the moment, which is incredible. Most Americans have seen loan interest reduced by several percent in recent months on credit card balances as well. Analysts seemed quite uncertain as to whether this might be the end of cuts. Some economists below that it is now time for the Fed to begin shifting focus to inflation. Several strong economic data reports on Thursday (May 1) might bolster that belief.

Although some economists now believe it is more likely that the GDP contracts during the second quarter (April through June), others hold a more optimistic view that recession will be avoided. Some regional reports show some parts of the country seem to be improving economically. A new report out of some Midwestern states suggests growth could be picking up. Consumer spending was also up significantly during March. The dollar is gaining momentum. Oil prices have dropped about $9 to around $111 per barrel in the last few days. Many companies have reported better-than-expected earnings.

The challenge for the Fed is to decide whether more action needs to be taken to improve the economy, stabilize credit and housing, and motivate consumer spending. It is important for the Central Bank’s timing to be precise as inflation remains a concern. At some point, the Fed may have to quickly undue some of its rate cuts in order to help control record high consumer pricing numbers. Consumers are already dealing with high gas and grocery prices. Inflation is often countered with a rate increase strategy. Several leading Bank members have been leery of the recent rate cuts because of their concern about inflation.

The first several million taxpaying households began to receive tax rebate direct deposits this week, with more to continue in the next couple weeks. These will be followed by several weeks of mailed rebate checks. Given the slightly better than anticipated GDP, the surprisingly strong consumer spending, and the aggressive rate cuts and rebates, it is possible the government has done what it can, and should, to jump start the economy. Unfortunately, they must likely make that decision before the numbers are fully developed to validate it. It will likely take several months to see whether consumers are spending their rebates or saving them.

One of the best benefits of the strong economic news of the past couple days is that it has strengthened dollar speculation and similarly helped lower oil prices. The dollar is closing in on 105 yen and has hammered the Euro back to a value of $1.5449 currently only a little more than a week after it cleared $1.60. While it is possible the dollar could still weaken in the coming months, some forecasters are starting to suggest the currency has reached bottom and possibly the economy and stocks have as well.

The latter half of 2008, as suggested earlier in the year, could provide to be a turning point of major proportions in the medium-to-long-term development of US and world economies. If the US economy can rebound behind credit and real estate markets, the dollar would likely climb swiftly, and order could quickly be restored. Of major interest will be what type of economic the next several months in the economy might have on the November presidential elections. Current polls show Republican John McCain slightly behind against both Hillary Clinton and Barack Obama if the elections were held today. A surging economy might give more credence to McCain given the current administration.

Market Recap

Stocks closed flat Wednesday after the Fed dropped interest rates a quarter point, but gave no indication as to future moves. The Dow closed off 11, while the NASDAQ and S&P were down 13 and 5, respectively. The Dow closed at 12,820. In a bit of a surprise, the gross domestic product grew at a .6% clip during the first quarter. This is not strong growth, but better than some expected. Stocks surged Thursday thanks to some appealing economic data and following the Fed rate cut of one quarter point. Consumer spending was up largely due to increases in retail gas and food prices. Oil dipped back near $111 per barrel. Exxon missed its earnings forecast.

Neil Kokemuller
Thursday, May 1, 2008
4:47 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

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