US economy shrank in first quarter amid collapse in exports

World's largest economy contracts by 0.7pc on an annualised basis, as the strong dollar acts as a headwind to the recovery

The US is on course for its worst first half performance in four years, after revised data showed the economy shrank in the first quarter. 

The world's biggest economy contracted at an annualised rate of 0.7pc in the first three months of the year, compared with an initial estimate of an expansion of 0.2pc. 

The downward revision was mainly due to a larger trade deficit and smaller inventories. A brutal winter also dampened consumer spending more than previously thought. However, the overall decline was shallower than the prediction of a 0.9pc contraction by analysts. 

While employment has remained strong, the strong dollar, which has appreciated over the past year by around 17pc against a basket of other leading currencies including the euro and pound, has caused headwinds for exporters. 

Data on Friday suggested the rebound in the second quarter may not be as strong as some expect. The Institute for Supply Management (ISM) Chicago business barometer fell to 46.2 in May, from 52.3 in April. This is well below the 50 level that divides growth from contraction. 

"[The contraction] reversed all of April’s gain and casts doubt on the strength of the widely expected bounceback in the US economy in the second quarter," the ISM said in a report.

DYI Comments:  Credit spreads have begun to widen! 

The spread between the 30-year US treasury and 30-year term mortgage rates is a function of the risk premium the lender community demands, expansion of this spread is a normal part of increasing deflationary expectations, as lenders now believe that defaults will increasingly be part of the marketplace, particularly on mortgage credit.

Which is to be perfectly expected — instead of letting the housing bubble fully liquidate, the central bankers pumped it up even further with QE, TARP, and various housing-targeted stimulus programs.

What this rising spread is actually telling us is that the US economy is getting weaker, and lenders just aren’t as confident that they’re going to get their money back.

Additionally, if you look at what’s happened to the US 30-year Treasury bond debt yields, they’ve done nothing other than the ordinary month-to-month volatility recently. Nothing to be alarmed about, no major shift in expectations for inflation or economic growth.

If anything, the fact that private sector credit is getting a lot more expensive relative to government credit is a sign of deepening deflation worries. A similar thing happened in the 1930s as well, when government bonds did quite well, but corporate/private sector debt performed incredibly poorly on account of credit-worthiness concerns.

So far I'm not making a recession call, however, storm clouds can be seen from a distance with mortgage rates rising.  This is not part of the Fed's normalization of interest rates as it appears they may be simply following rates higher.

The Great Wait Continues.....

DYI

Canadian Real Estate continues to be red hot!  

80% of the citizens of Canada living within 200 miles of the U.S. they would recognize their real estate bubble but alas they believe it is different north of the 49th parallel.

Short Video regarding a few properties in Vancouver.