While the downward revisions to GDP increase the risk of a double-dip recession, there are significant elements of potential support for the US economy. The trade-weighted dollar is close to record lows, which increases the relative attraction of US goods and services to foreign trading partners and boosts the potential for trade and earnings of US multinational corporations. This support from exports could be most prevalent in the emerging economies, which account for about three quarters of global growth. Short-term US interest rates are close to zero, and the Federal Reserve has indicated that it intends to keep short rates low for the foreseeable future. This has served as an anchor for holding longer-term Treasury yields at historic lows, and thus the yield curve, which has inverted before every recession, is near record levels of steepness. Corporate profits are strong - S&P estimates second-quarter S&P 500 earnings are up 19% year over year - and balance sheets appear healthy since many companies are holding large amounts of cash. Retail sales appear to be more robust than indicated in second-quarter GDP. The ICSC/Goldman Sachs Retail Chain Store Sales Index has surged to new highs in recent weeks and is up 4.2% from last year, the high end of its 2005 through 2007 growth rate. This is reflected in the performance of S&P's retail index, which has beaten the S&P 500 by more than 7% on a relative basis since the first quarter of 2011. Thus, despite a week full of disappointing news, the S&P remained within our 1250 to 1365 decision box (see Weekly View, 7/25/11).

David Fuller's view The most interesting point here, in my opinion, concerns the yield curve (historic & monthly 20yr), a lead indicator which Rod Smyth & Co reminds us has inverted back below zero before every recession. That is reassuring and I hope that it remains a necessary precondition for a US recession.

However, if it is different this time, in the 'new normal', that would be because the Fed, in inflation-fighting mode, has induced earlier recessions by raising short-term interest rates to the point of yield curve inversion. With the Fed promising to keep short-term rates low, we are likely to find out over the next year or two whether or not the US economy can slip into recession in the 'new normal', without an inverted yield curve.