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An Expected Slowdown – No Big Deal


The first quarter (Q1) of GDP was surprisingly strong at 3.2%.  This was higher than expected, due to two things.  One, imports dropped considerably, showing the impact of tariffs.  Two, inventories increased more than expected, also reflecting the build-up before tariffs took effect.  Only one person thought that growth rate was sustainable.

The early second quarter (Q2) data is substantially weaker.  Retail sales and factory output have both decreased.  Consumers appear to be holding back, due to the trade war uncertainty, and manufacturers are also scaling back for the same reason, along with the stronger dollar.  (Of course, the all-important labor market continues to be strong, with a near 50-year low in unemployment.)  Economists are standing in line to lower their Q2 forecasts.  Most are now in the neighborhood of 1.6% to 2.3%.  This was a typical growth rate coming out of the recession but low since President Trump scrapped so many regulations and stimulated the economy with debt, by cutting income taxes and increasing spending.

I don’t consider any of this worrisome in the short term.  It is just an expected slowdown.  (A slowdown is not a shutdown).  The vast majority of the 138 economic data points released each month are still very positive.  Any recession this year would certainly be a big surprise.  A recession next year, while not certain, would not be a big surprise.

Most people worry too much about a recession and too little about a financial crisis.  It is much easier to foresee a recession than a financial crisis, but right now, neither is on the short-term time horizon.

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