Despite US GDP Contraction, Three Reasons Support USD’s Strength

Recession is generally defined by two consecutive quarters of economic shrinking. The US economy squeezed by 1.4% in the first quarter of 2022, so it would only take another one to have an official downturn. Not so fast – not a recession, nor the dollar.

The US economy grew by 6.6%, and inflation eroded it by 8%, hence the negative 1.4% growth. That is a reason for the Federal Reserve to raise rates aggressively and thus send the dollar higher. The Fed announces its decision only next week, and some dollar profit-taking is currently seen, a part of end-of-month flows. This opportunity to correct some of the massive dollar gains could fade sooner than later.

Even without waiting for the Fed or flows to fade, focusing purely on the report provides three significant silver linings that could help the greenback recover.

1) Personal consumption is up 2.7% annualized in the first quarter vs. 2.5% in the fourth quarter of 2021. That means shoppers remain resilient despite rising prices. Consumption is roughly 70% of the US economy.

2) Inventories have eroded some 0.8%, more than half of the contraction has come from using existing materials in storage. When inventories are drawn down in one quarter, they tend to be replenished in the second one. Less growth now, more later.

3) Net trade slashed no less than 3.2% from growth – an anomaly for this usually benign factor. This seems like a “pothole” that could be reversed in the second quarter.

It is surprising that the devil is in the headline, not in the details this time. All this should lead to a resumption of the bullish dollar trend. Let us know how we are doing.