Thursday, May 29, 2008

Weak dollar propping up GDP

Previous reports of 0.6% GDP growth in the 1st Quarter of 2008 have been revised up to 0.9%. What is propping up the numbers? Thanks to an increasingly weak dollar our trade deficit is narrowing. The Financial Times explains,

A narrower US trade deficit helped the economy grow at a 0.9 per cent annual rate in the first three months of this year according to preliminary government data published on Thursday.

First quarter gross domestic product was revised higher from an originally reported 0.6 per cent annual rate, adding weight to the argument that the US economy did not fall into recession at the turn of the year.

No we have not yet fallen into a technical recession as we have not yet had consecutive quarters of negative growth. As Harvard economist Jeff Frankels explains though we are in a growth recession and many other indicators outside of GDP demonstrate the clearly troubled state of our economy.

Jobs have been lost each month since January. Total hours worked is my personal favorite, because in addition to employment it captures the length of the workweek, which firms tend to cut before they lay off workers. This indicator too has been falling.

And of course there are the longer run indicators that have been very worrisome for almost a year: depressed household balance sheets, mortgage defaults, high oil prices, low consumer confidence, etc.

The economy is a four-engine airplane flying at stall speed, skimming along the top of the waves without yet going down. Real gross domestic purchases increased only 0.1 percent in the first quarter. But exports provided an important source of demand for US products, and are likely to remain a positive engine of growth in the future. The same is true of the fiscal policy engine, as consumers receive and spend their tax cuts in the 2nd and 3rd quarters. On the other wing, the investment engine has been knocked out; inventory investment is likely to fall and residential construction will remain negative for sometime. The big question mark is the consumption engine. Is the long-spending American household taking a hard look at its diminished net worth and taking steps to raise its saving rate above the very low levels of recent years?

We are already clearly in a “growth recession.” All in all, I put the odds of an outright recession sometime this year at greater than 50%.

Bush's de-facto weak dollar policy is papering over the weakened state of our current economy, is severely impacting the lives of middle-class and working-class Americans and essentially tying the hands of the Federal Reserve.

The upward revision of 1st Quarter GDP is not actually a positive development, instead it is indicative of the financial crisis facing America.

1 comment:

sbvor said...

With today’s 50% upward first revision to the Q1 GDP data, the likelihood of a recession is fading really, really fast.

It is probable that Q2 will show slower growth than Q1. But the best minds remain convinced Q2 will show positive GDP growth, every quarter of 2008 will show positive growth and 2009 will grow faster than that.

Once we get the final numbers for Q2 (9/26/08), we will be able to safely bury all this media hysteria in the ash pile of a very long, very sad history of media folly.

Fortunately, we’ll be able to bury the 2008 recession myth before the November election. Thus, the political ploy on the part of Dems will have backfired (big-time).

See my latest updates on this sorry media driven hysteria here:
The Recession of 2008 That Wasn’t?