US GDP Analysis: Silver linings mean softish landing, Goldilocks for dollar bears (for now)

Recession – the world's largest economy has shrunk for two consecutive quarters, meeting one definition of a recession. It is not an official recession just yet – only the little-known National Bureau for Economic Research (NBER) calls such events – but the initial headline is worrying. Not until we look into the details.

First, inventories have cut some 2% off GDP. If they had only stayed unchanged, the read would be positive. The same phenomenon happened in the first quarter, and when stocks are depleted for such a long time, they tend to be replenished afterward. Therefore, there is a good chance that rebuilding inventories will send GDP to positive territory in the third and perhaps fourth quarters. 

Secondly, inflation is a bigger issue than expected. The GDP Price Index – dubbed "the deflator" – pointed to an annualized increase of 8.9% vs. 8% expected. If this deflator had only met estimates, GDP would remain unchanged. That is little comfort, as inflation hurts, but it puts things into proportion. When price rises decelerate, there is room for real growth to pick up. 

Third, it is essential to put the headline figure into proportion. Contrary to several other countries, the US publishes annualized figures. A 0.9% drop in annualized terms is only around 0.2% in quarter-over-quarter data. Such a squeeze is far from being devastating. 

There are reasons to be worried, such as the drop in consumption of durable goods, but it is balanced by an encouraging leap in exports. 

Another note about a recession: weekly jobless claims have only marginally edged up to 256,000, within expectations. If unemployment claims are "the canary in a coal mine" when it comes to signaling a downturn, the canary is still singing cheerfully. 

The dollar has dropped due to the Goldilocks data – on the one hand, the US economy is slowing, thus implying a lower path of rate hikes. On the other hand, it is a "softish landing" as Federal Reserve Chair Jerome Powell once said. 

The data is weak enough to weigh on the dollar without being too bad to trigger safe-haven flows toward the greenback. 

Can this last? The Fed is fully data dependent, and the current slide in the currency is set to last until the next data point. If the Employment Cost Index shows a significant jump, it would indicate inflation is becoming more entrenched – which would mean higher rates. The same applies for Nonfarm Payrolls due out next week and inflation data due the following one.