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GDP

August 27, 2010 – 4:55 pm

This morning all eyes were focused on the revision of the second quarter GDP growth rate. The initial read a month or so ago was 2.4%. The revision was expected to come in at 1.3% and the actual number was 1.6%. That was somewhat of a relief as some economists were thinking it was going to come in a 1% or less.

The most dramatic part of the revision was the import/export numbers. Exports rose in the quarter by 9.1% but imports spiked 32.4%. More imports versus
exports subtracts from the GDP. It represents a drag of 4.45%. That is a very strong impact. In fact, imports were at the highest level since the May through June quarter of 1993.

Taking a broader scope, where did all those imports go? There was little inventory build that went from an initial read of growth in inventory of 1.1% to .6% in today’s revision. Consumers had to absorb much of those exports and it was not in oil where most of our inventory growth comes from. These were mostly consumer goods. At the same time, consumers were saving more in the quarter as the rate rose to 6.1%, the highest in some time.

The consumer is suffering, of that there is no doubt. The fear is all about the possibility of a double dip recession. Without the consumer spending some of their trillions of dollars in money market and low yielding treasuries and corporations not spending their trillions our economy is going to suffer. The double
dip is a possibility just not a probability at this point, but that possibility is increasing. We have only had one double dip recession in our history and that was at a time when inflation was a problem and the Fed began to raise rates. We have no inflation, but what about deflation?

To me it feels like fear is in control and if that is so it is time to get into the market.

Good Trading
Steve Peasley

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