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US Economy’s Rapid Q1 Expansion Does Little to Lift Struggling Dollar

by Matt Eidinger | April 29, 2021

The US dollar is struggling to advance this morning after weakening notably Wednesday in the aftermath of another massive stimulus bill announced by US President Joe Biden and a Federal Reserve indicating it will act like a dove indefinitely.

Blowout GDP figures reported for the first quarter of 2021 draw attention to the stunning economic comeback underway in the United States, but did little to help a currency that has fallen nearly a full point on a trade-weighted basis over the past week. The greenback is modestly higher on today’s session after a moderate recovery in overnight trading.

According to the US Bureau of Economic Analysis, the American economy advanced 6.4% in the first quarter of 2021, according to the advance estimate. The first quarter of the year was a period that saw a rapid reversal of economic fortunes across the country as many states emerged from lockdowns in response to a nationwide vaccination campaign that energized consumers as well as businesses enough to regain the confidence necessary to drive economic growth.

Consumer spending on goods soared 23.6% as businesses expanded labor recruitment and US consumers took advantage of excess funds, improving economic conditions and reduced restrictions. Gains in consumer spending on services were modest, at 4.6%, but in line with pre-pandemic trends. With the exception of the third quarter last year, consumer spending on durable goods expanded at the fastest rate in a decade – 41.4%.

As expected, federal government spending took on a larger share of the economy once more, advancing to more than $1.3 trillion last quarter. Personal current transfer receipts, which are social benefits paid by the government to workers, rose for the first time since the second quarter of last year when the first fist coronavirus relief package was passed into law.

US President Joe Biden has proposed two additional infrastructure and social welfare spending bills – totaling nearly $4 trillion when taken together. Due to the number of moderate Democrats that the Biden administration is dependent on in both houses of Congress, the final amount of fiscal stimulus will likely be watered down when the two bills are passed into law. But even with this in mind, the recent trend of increased government spending in the American economy could continue to increase notably.

Separately, the Department of Labor also reported rosy economic data today. 13,000 fewer claims for unemployment insurance were filed across the United States last week – bringing the weekly total down to 553,000 during the week ending April 24, a pandemic-era low.

Continuing jobless claims rose slightly to 3.66 million for the week ending April 17. When counted alongside pandemic-related programs and extended benefits, the figures were 16.5 million according to the most recently available data for mid-April.

All eyes now turn to tomorrow’s consumer inflation figures, which the Fed will be watching closely. The Fed has stated that it will only begin to talk about tightening monetary policy once inflation consistently exceeds its 2% target. With expectations for a reading just under 1.8% tomorrow, the meaning of the word “consistently” could be stretched very far in the coming months.

Matthew Eidinger
Market Strategist & Fintech Specialist

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