U.S. Economy Reaches a Fork in the Road

There's been a lot of good stuff written on the GDP report, much of it on the slightly boring question of whether it means we're in a recession. To me, the answer's pretty simple: You have to be clear about what you're forecasting, and anybody who predicted that we would have negative growth in the first quarter was wrong. (Unless the report gets revised massively downwards, which is improbable but not impossible.) And there aren't many people out there who said that we would be in the kind of recession where the GDP figures record 0.6% growth.

Still, by no means is this an encouraging report. I'm particularly disheartened by the figures for net exports:

• Real exports of goods and services increased 5.5 percent in the first quarter, compared with an increase of 6.5 percent in the fourth.
• Real imports of goods and services increased 2.5 percent, in contrast to a decrease of 1.4 percent.

So export growth is slowing, even as imports are rising again, despite the dollar only getting weaker over the course of the quarter. I have no idea why this might be, but I'm now less hopeful that the US economy is going to rescued by the weak dollar.

In any case, GDP growth remaining stubbornly in positive territory should, finally, make it possible for the Fed to stop cutting rates. If Fed funds stay at 2% for the foreseeable future, then Bernanke's accommodative monetary policy will eventually feed through into growth - although of course it will only exacerbate the already-significant inflation problem.

I feel like we're at a fork in the road right now. There are two possible outcomes: Either the crisis will remain contained within the housing and finance sectors, in which case we should be able to bounce back, or else it will feed through into the economy more generally, in which case defaults will rise, employment will fall, and a nasty recession, complete with negative official growth rates, will bite right in the middle of the presidential election campaign.

The Fed has done what it can; the dice are rolled. All we can do now is watch to see what happens.

Comments

[continuum]

Mr. Salmon, what if the inflation is higher than CPI as everybody knows? There're estimates as high as 7% regarding the difference between CPI and real inflation, taking out various artificial adjustments such as substitution and hedonics? GDP growth would've been negative since Q4-07.

Here's a ref on the falsehood of CPI:
www.shadowstats.com/ar...

[icandoitdon]

continuum is exactly right about the CPI. it's a joke. the feds have a vested interest in keeping this number as low as they can and that's exactly what they do.

it always amazes me that so many people buy this idiotic notion that a collapsing dollar helps exports. if true, the reverse should also be true...it hurts imports. since when has the american public ever been disuaded from purchasing imported products by a strong dollar? show me the correlation. it doesn't exist.

[Egg]

What amazes me about the CPI is why senior groups (like the AARP) don't make an issue out of it.

Retirees are being increasingly cheated every month, every year in the amount of money they should be receiving through social security.

[TraderGreg]

Yes - they are fleecing retirees, by artificially under reporting the CPI. What else is new. They do it for 30 years. Why people do not complain?

The real inflation, takes money from poor to rich. This is what Obama and Hilary propose - various bailouts that will crank up inflation.
I am not going to vote - so don't have any political agenda. I don't like all candidates. They suck.

Best

[TraderGreg]

Felix - good article. I just get angry each time, I see them report the fake CPI.
Cheers

[VP ofCommon Sense]

I work in pulp and paper, and I can assure you that a falling dollar has helped exports and hurt imports. There are pulp and paper mills operating in the USA that have no right being in business, and there are paper mills going under left and right in eastern Europe and Canada.

In the pulp and paper industry margins are slim to none (0-5%), so exchange rates and freight are more than enough to swing the day. At the same time it is a capital intense business so cheap labor from country X isn't enough to overcome the other factors.

[JohnPseudonym]

How can you have a collapse in the housing market and not have that spill over into the general economy?

Of course it has and will continue to spill over.

The house mess is bottoming/over when national home prices increase 3 months in a row...that's what I'm looking for.

[huskerbob]

It would be interesting to see a list of all of the nations that have successfully strengthened their economy by degrading their currency. I am already familiar with many examples of nations that seem to have caused the opposite effect through the same method.

[punk_ash]

I am stunned by Fed action today. I have no words. I am speechless. All the Fed members should live the life of a commoner for a week, they are killing our currency, Oil and Food were too cheap in US to start with, and this was waiting to happen, so I got no problem with inflation, but debasing my currency, these guys are bankrupting me of all my savings, these $s are useless, and by the time, I have realized this, already lost 50% of my net worth. All this while we were busy watching super bowl and brittney spears. Bravo

[fg144331]

I don't think the "3" runners know a tinker and the Fed is questionable.
I'm voting for RonPaul.com, I know, wasting my vote, but if you read
his website and articles, he has nailed down the problems. If someONE
doesn't do something RIGHT the USA is gone!

[icandoitdon]

vp of common sense....

there are always selected companies/industries that are affected disproportionately by by currency fluctuations. if the paper industry is one, it doesn't negate the fact that the falling dollar has had little aggregate effect on americans' near-insatiable appetite for foreign made products and that the effect of a weak dollar policy on aggregate exports is overstated.

p.s. if the domestic paper industry has so much going for it with the weak dollar i'd like to understand why international paper (IP) is sitting at a 17 year low.