Good News?

The economy turned out to be weaker than expected. Why is this good news?

On Friday the Commerce department reported that the economy grew at a rate of 1.6% during the second quarter rather than 2.4% as originally reported. That’s down significantly from the growth rate of the first quarter, which was almost 4%. So if the economy is slowing, why did interest rates rise, stock prices rally, and oil prices go up? Isn’t slower growth bad news?

It is if you’re a doom-and-gloom forecaster. Robert Shiller, author of “Irrational Exuberance,” claims that the risk of a second recession is more than 50%. He also noted that home prices could decline, as they did in Japan, for up to 15 years. The other usual gloom-sters could be seen on TV over the weekend.

But when you look into why growth was revised, you see a very different picture. This isn’t a case of consumer demand being revised downwards. Demand was actually stronger than last quarter. But we imported a lot more than Commerce originally estimated. Stronger imports are a sign of strength, not weakness. Only this time we exported some of our strength to the rest of the world. They responded in kind and our exports went up, too. But they couldn’t keep up with imports, the deficit widened, and that took away from GDP.

The recent surge in imports is atypical, and curious. My own hunch is that it is due to all the foreign content in much of our domestically produced goods. Did you know that the new Malibu built in Kansas City has 25% of its parts produced outside North America? Or that the iPad, designed in California, is assembled in China from parts in Korea Japan, and Texas?

All this trading makes for slower growth in the short-term, but a more efficient and robust global economy in the long term.

Douglas R. Tengdin, CFA
Chief Investment Officer
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