“We are somewhere in the twilight zone between an expansion and a recession,” Michael Feroli, an economist at JPMorgan Chase & Co. (JPM) in New York, told Bloomberg News. “We will have a poor pace of growth through the year.”

The preliminary estimate of GDP represents an increase from the Apr. 30 advance estimate of 0.6% and is based on more complete economic information.

Economic expansion was primarily due to a boost in exports due to the combination of a weak dollar and strong overseas sales. Imports also declined, as the trade deficit shrank to its lowest level in five years.

The slight boost in GDP could be just what the U.S. Federal Reserve needs to hold off on any further interest rate cuts.

“The underlying domestic demand in the economy showed slight improvement. It’s probably consistent with the Fed being on hold in June and several months after that,” Nick Bennenbroek, currency strategist with Wells Fargo & Co. (WFC) in New York, told Reuters.

The Fed’s aggressive rate-cutting campaign has brought the Fed Funds rate down to 2.00% from 5.25% last September. But while it seems the cuts are helping the U.S. economy skirt a true recession – defined as two consecutive quarters of negative GDP growth – those same cuts have added fuel to the inflation fire.

The minutes of the last policymaking Federal Open Market Committee (FOMC) meeting showed that the Fed’s inflation forecast was raised from a range of 2.1%-2.4% to a range of 3.1%-3.4%.

And many analysts, including Money Morning Contributing Editor Martin Hutchinson, feel the Fed will need to raise rates to combat that escalating inflation.

“The nation’s central bank will soon have to reverse course and start raising interest rates – and probably in a hurry, too, if the Fed wants to keep oil prices on this side of the stratosphere,” Hutchinson said in a recent Money Morning investment analysis.

And with the economy still growing, even at a sluggish pace, the Fed might be able to take Hutchinson’s advice. The upward revision to GDP comes close on the heels of other recent economic reports that were better than expected, including April durable goods orders and April retail sales.

“Data reported so far point to continued expansionary growth in the second quarter,” Sam Bullard, a Wachovia Corp. (WB) economist in Charlotte, North Carolina, said in a research report, Reuters reported.

The economic stimulus checks sent out to over 130 million U.S. households could provide a nice boost to the economy. If consumers spend that money, rather than using it to pay down debt or pad their savings, it could turn into a nice shot of growth for GDP in the second quarter. The third (and final) estimate for first quarter GDP will be released on June 26.

By Jennifer Yousfi
Managing Editor

Source: U.S. Economy Expanded Faster than Reported, With First Quarter GDP Revised Upward to 0.9%

London ’s leading index headed straight up at the open adding 69 points at the open to 6,156 following a good day on Wall St. yesterday.

The Dow put on 189 points to close above 13,000 for the first time since the start of the year – no doubt a significant closing level for technical analysts. The gain came as financial stocks made the running and in spite of ExxonMobil shedding 3.6%. Exxon is struggling to up production reports the FT as it falls victim to resource nationalism. African production fell 20% after it was forced to hand over more to host governments and its Venezuelan interests were nationalised.

Continues below …

FLEET STREET LETTER ALERT

3 “Gloom-Loving Stocks” for the Coming Recession

Dark clouds are gathering over the UK economy.

But for contrarian-minded investors, this spells opportunity.

The Fleet Street Letter has just been given permission to share three such money moves with you today.

You can read the full briefing here

Forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. Customer Services: 0207 633 3600.

The bounce in US stocks reverberated around the time zones. The Nikkei was up over 2% to close above 14,000 and China’s leading index, the Shanghai Composite added almost 5% as it breaks out from a six month downtrend. European bourses are up across the board this morning.

So is it over? Or is this premature as the IHT suggests? Stock markets are forward looking by six months or so, so are presumable focused somewhere on the end of this year and the bulls see something better out there. But lest we get too carried away the world can look very different at street level. It was only on Monday that Warren Buffett was warning “ my general feeling is that the recession will be longer and deeper than most people think. This will not be short and shallow. I think consumers are feeling gas and food prices and not feeling they’ve got a lot of money for other things.”

Except perhaps for the one off “tax rebate” cheque sent to US taxpayers in the post this week. But some relief is coming too from a sector that of late has been a chronic thorn in the side of central bank inflation targets – the commodities market. Commodity prices have been falling of late across the board – energy, industrial and precious metals and agricultural commodities. The price of crude is down for a fourth day running with Brent Crude at $110 and West Texas light sweet crude a shade under $112. Lehman Bros said recently there was $20-30 of “hot money” in the crude price.

Why the pull back? It’s all about the dollar says commodity strategist, David Moore of Commonwealth Bank in Australia:

“The demand for investing in commodities as a hedge for U.S. dollar weakness has faded.”

Which gives us a clue as to the nature of the demand. There’s actual physical demand for commodities according to their use and then there’s more speculative investment demand. With the revival of interest in the sector, how much of the price is attributed to each? We don’t know but given the rapid rise in popularity of the commodity exchange-traded fund, we suspect the balance has tilted significantly in recent years towards the speculator.

That fading interest in hedging has helped the dollar claw itself back from a low point at 1.60 to the euro, to 1.54 now. When even central bankers are telling the market it’s not so bad, investors worries are starting to subside. Says Japanese fund manager Tetsu Emori:

“Worries about the financial market turmoil and even an economic slowdown seem to be softening, so that’s why people are selling gold.”

As such gold continues its slide south, at one point unwinding all the way to its $850 price at the start of the year. Just as the dollar stages something of a rally, the Gulf States may finally be coming to the conclusion that pegging to it is not after all such a good idea as dollar weakness adds to their domestic inflation problems. Something even Alan Greenspan actually advised them to do on a visit to the region. Kuwait has been the only one to drop its peg to date and has seen its currency appreciate almost 8% against the dollar since. Its Finance Minister Mustafa al-Shimali seems confident other Gulf Cooperation Council states will follow its lead – “some countries will do what we are doing.”

Here at home, the winds of political change look to have blown pretty hard yesterday. UK government worries about taking a pasting from the electorate in the local elections proved well founded. They did – their worst result for 40 years. With the Mayoral vote still pending, it could prove a very black day for New Labour. Still after 11 years in government you take some wear and tear, mistakes are made, support disintegrates, people get disillusioned or just fed up with the same old faces.

And it doesn’t help when the much touted UK economic miracle that has notched up 60 consecutive quarters of growth is looking a good deal less miraculous. The progressive puncturing of inflated house prices, aided and abetted by a mortgage famine is exposing gradually testing the debt-laden underbelly of once enthusiastic consumers. British bank HBOS announced house prices fell by 3.7% annualised over the year to April. It is the worst housing market performance since 1993 and comes on top of a controversial scrapping of the 10% starter tax rate. Who’s to blame? The government, of course. Much to the delight of the Tories for whom the ERM debacle is now but a fading memory.

Regards,

Rob Mackrill
The Daily Reckoning

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