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Strong Dollar = Weak Report


For many years, the traditional but unofficial definition of a recession has been two consecutive quarters of negative GDP growth.  Since the first read on GDP in the first quarter was a negative 1.4%, does that mean a negative number in the second quarter will show us in a recession?  No!

The fourth quarter of last year was a tremendous 6.5%.  The drop from a positive 6.5 to a negative 1.4 is a quantum drop, but the numbers are misleading . . . as usual.

Consumer spending is 65-70% of GDP.  If it fell precipitously, overall GDP would also fall badly.  However, it rose 2.7%, better the expected 2.5%.  The biggest problem is that our balance of trade exploded in the first quarter . . . due to a sharp rise in the value of the dollar, making foreign goods cheaper for us to buy but making our goods more expensive to foreigners to buy.  Hence, our exports dropped and our imports exploded.  This one sudden change reduced GDP growth by 3.2%, which means last quarter was positive 1.8%, ruining our tidy definition of recession.

This report tells me more about the strength of the dollar than the strength of the economy.  Contrary to political talking points, the dollar is too darn strong!

Is the economy slowing down?  Absolutely!  Are we headed into a recession?  Probably!  Will it be a severe recession?  Nope!

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