The latest signals from the world?s foremost economic powerhouse are mixed, to use a clich?. The US economy has trotted out GDP growth numbers that show the impact of the subprime heat, which has melted the housing market, created a run on weak banks and forced the Fed to cut its funds rate. But, and this is important, the Fed should be relieved to find that its sequence of rate cuts?the benchmark is now at 2%?may be doing the economy a good turn. The US has narrowly escaped recession, registering growth of 0.6% in the first quarter of 2008, about the same as the last quarter of 2007. This performance is better than the consensus estimate of 0.5%?by a whisker, but better nonetheless. The silver lining was the 5.5% growth in exports, largely fuelled by a weakening dollar. This means the US current account deficit, which has played a big role in the global abundance of greenbacks (as exporter countries, mostly in Asia, ran up huge surpluses), could be on a reversal course. If this trend is sustained in an orderly manner, it could buoy the dollar, seen to be in decline because of America?s ?twin deficits? (its fisc being the other one), among other factors. Whether this also implies a moderation of dollar inflows into India, a phenomenon that reached crisis proportions in 2007, could depend on whether the effect is offset by variables such as interest rate differentials and currency-neutral investment prospects here. It will help if RBI limits the scope for foreign investors to bet on a rupee-dollar peg.
The US economy, of course, needs to be watched even more closely. Consumer spending, which accounts for 70% of America?s GDP, increased 1% in the first quarter. Though this is the weakest growth since the 2001 recession and less than half the Q4 figure last year, it is not negative at least. Inflation has cramped US spending on food and energy, while sales of automobiles, furniture and other durables have shrunk. Business investment has dropped by 2.5%, the worst investment quarter in four years, and residential investment plunged 26.7% on an annualised basis. This is a veritable housing bust, the worst since 1981. Numbers on the inventory buildup front are good. But the big question now is whether Q2 will see the US slip into recession.