The US 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.

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