Economic Growth Revised Up to a Healthy 2.5% for Q2

From April through June, the U.S. economy grew 2.5%. This is a much higher than the first estimate of 1.7%, released by the Bureau of Economic Analysisjust a month ago. Even better, it's at the high end of the 2-3% ideal growth rate. It's also more than a percentage point higher than first quarter's GDP growth rate of 1.1%.

Why was the revision so dramatic? The BEA improved its estimate as it received better data during the month. It found that exports were really a lot better than it originally thought. (Source: BEA,GDP Second Estimate, August 29, 2013)

How It Affects You

Today's report means that the Federal Reserve is more likely to begin tapering its Quantitative Easingprogram, possibly as early as next month. That's because growth is well within the Fed's stated target of 2.3%-2.6% growth, which it wants to achieve by the end of the year.

In addition, there's a political reason the Fed may start tapering sooner rather than later. President Obama is likely to announce his choice for Fed chair to replace Ben Bernanke in January. Regardless of whether it's Janet Yellen or Larry Summers, the Fed will want to make the transition as smooth as possible. One good way to do that is to start the tapering before that announcement is made.

Who Would You Pick With Fed Chair?

Although monetary policy is important, what's more important is the economic strength indicated in this report. It's very solid, as growth is being driven by exports and residential construction, and despite sequestration and tax hikes in the first quarter. Unfortunately, this growth rate may not continue for the third quarter, if July's downturn in durable goods orders continues.

Why the Dollar Has Strengthened

Thursday August 29, 2013

The dollar has strengthened in the last week as the U.S. announced its readiness to launch airstrikes against Syria. The dollar is a typical safe haven in time of crisis. The ICE dollar index went from 80.93 on August 19 to 81.2 on August 27, 2013.

It also initially strengthened in response to the Federal Reserve's announcement that it would cut back on Quantitative Easing.  The ICE dollar index went from 80.96 on June 17 to 84.78 on July 9, 2013. However, it then dropped back down to 80.03. The Fed's announcement caused Treasury yields to rise, from 1.6% on May 2 to 2.9% on August 22. This indicates a weakening dollar, as higher yields result from lower demand for Treasuries.

Higher interest rates means the dollar is now more expensive to borrow, which reduced investments inIndia and several other emerging markets. First, it meant investors could no longer borrow dollars as cheaply in America to invest in these growing overseas economies. Second, the Fed actions signal an improving U.S. economy. That makes investors feel more confident in returning to the U.S.

India hasn't helped its situation by running a largecurrent account deficit. In other words, it imports more goods, services and investment that it creates at home and exports. As its currency falls, inflation rises. When combined with slowing growth, many experts are concerned about stagflation. Fleeing investors have sent the value of India's currency, the rupee, plummeting 15% since June.

Other emerging markets with high current account deficits have suffered the same fate.  Since June, currencies have fallen 9.7% in Brazil, 13.6% in Indonesia and and 7.9% in Turkey.  The situation in Syria doesn't help, as it simply encourages investors to return to the safe haven U.S. dollar.

Source: BY http://useconomy.about.com/

Thursday August 29, 2013