US: Temporary slowdown, but fundamentally sound

by: Peter de Bruin

The economy most likely rebounded sharply in the first quarter, as inventories gave a temporary boost to growth, and households increased their spending, despite being hit by a $200bn increase in taxes. However, the March reports struck a much weaker tone, suggesting that economic momentum faded at the end of the first quarter. Indeed, with inventories no longer adding to growth, households reacting to the rise in taxes and the automatic spending cuts weighing on the recovery, we think that the economy will enter a period of slower growth. However, we stress that the underlying fundamentals have continued to improve and that growth should pick up towards the end of the year when the drag from the fiscal headwinds fades. Against this background, we see the Fed continuing to purchase longer-term assets at a pace of $85bn a month until the end of the year, before gradually letting its asset purchase programmes taper off.