KEY POINTS
Gross domestic product fell 0.9% at an annualized pace for the period,
according to the advance estimate.
That follows a 1.6% decline in the first quarter and was worse than
the Dow Jones estimate for a gain of 0.3%.
The drop came from a broad swath of factors, including decreases in
inventories, residential and nonresidential investment, and government
spending
The U.S. economy contracted for the second straight quarter from April
to June, hitting a widely accepted rule of thumb for a recession, the
Bureau of Economic Analysis reported Thursday.
Gross domestic product fell 0.9% at an annualized pace for the period,
according to the advance estimate. That follows a 1.6% decline in the
first quarter and was worse than the Dow Jones estimate for a gain of
0.3%.
Officially, the National Bureau of Economic Research declares
recessions and expansions, and likely won’t make a judgment on the
period in question for months if not longer.
But a second straight negative GDP reading meets a long-held basic
view of recession, despite the unusual circumstances of the decline
and regardless of what the NBER decides. GDP is the broadest measure
of the economy and encompasses the total level of goods and services
produced during the period.
“We’re not in recession, but it’s clear the economy’s growth is
slowing,” said Mark Zandi, chief economist at Moody’s Analytics. “The
economy is close to stalling speed, moving forward but barely.”
Markets reacted little to the news, with stocks slightly lower at the
open. Government bond yields mostly declined, with the biggest drops
at the shorter-duration end of the curve.
A separate report Thursday showed that layoffs remain elevated.
Initial jobless claims totaled 256,000 for the week ended July 23, a
decline of 5,000 from the upwardly revised level of the previous week
but higher than the Dow Jones estimate of 249,000, according to the
Labor Department.
Broad-based slowdown
The decline in GDP came from a broad swath of factors, including
decreases in inventories, residential and nonresidential investment,
and government spending at the federal, state, and local levels. Gross
private domestic investment tumbled 13.5% for the three-month period
Consumer spending, as measured through personal consumption
expenditures, increased just 1% for the period as inflation
accelerated. Spending on services accelerated during the period by
4.1%, but that was offset by declines in nondurable goods by 5.5% and
durable goods by 2.6%.
Inventories, which helped boost GDP in 2021, were a drag on growth in
the second quarter, subtracting 2 percentage points from the total.
Inflation was at the root of much of the economy’s troubles. The
consumer price index rose 8.6% in the quarter, the fastest pace since
Q4 of 1981. That resulted in a decline of inflation-adjusted after-tax
personal income of 0.5%, while the personal saving rate was 5.2%, down
from 5.6% in the first quarter.
“It really was to script,” Zandi said of the report. “The only
encouraging thing was that inventories played such a large role. They
won’t play the same role in the coming quarter. Hopefully, consumers
keep spending and businesses keep investing and if they do we’ll avoid
a recession.”
The recession question
After posting its strongest gain since 1984 last year, the U.S.
economy began to slow earlier this year due to a confluence of
factors.
Supply chain issues, brought about initially by outsized demand for
goods over services during the Covid pandemic, were at the core of the
problem. That only intensified when Russia invaded Ukraine in February
and, more recently, when China enacted strict shutdown measures to
battle a burst of Covid cases.
The first-quarter numbers also were brought down by a swelling trade
imbalance and a slowdown in inventories, which were responsible for
much of the GDP gains in the second half of 2021.
Now, the economy faces more fundamental problems.
Inflation began its steep ascent a year ago and then exploded in 2022,
hitting its highest 12-month increase since 1981 June. A slow-footed
response by policymakers initially has resulted in some of the biggest
interest rate increases the U.S. has ever seen.
The Federal Reserve over the past four months has raised benchmark
borrowing rates by 2.25 percentage points. Back-to-back 0.75
percentage point increases in June and July mark the most aggressive
two-month hikes since the Fed began using overnight rates as the
primary policy tool in the early 1990s.
“Recent economic data may not paint a consistent picture, but a second
consecutive negative quarter for GDP provides further evidence that,
at best, economic momentum continued its marked slowdown,” said Jim
Baird, chief investment officer at Plante Moran Financial Advisors.
“The path for the Fed to raise interest rates without pushing the
economy into recession has become exceptionally narrow. There’s a
growing possibility that it may have already closed.”
Still, Fed Chairman Jerome Powell on Wednesday said he expects the
increases to tamp down inflation but he does not see the economy in
recession.
The economic slowdown has created a political headache for the White
House as well. Following Thursday’s report, President Joe Biden said,
“it’s no surprise that the economy is slowing down as the Federal
Reserve acts to bring down inflation.”
“But even as we face historic global challenges, we are on the right
path and we will come through this transition stronger and more
secure,” Biden added.
Most economists don’t expect the NBER to declare an official
recession, despite the consecutive quarters of negative growth. Since
1948, the economy has never seen consecutive quarterly growth declines
without being in a recession.
The feeling, though, on Wall Street is that the economy could well hit
recession later this year or in 2023 but is not in one now.
That may not be enough to change public perception, however. A Morning
Consult/Politico poll earlier this month indicated that 65% of
registered voters, including 78% of Republicans, think the economy
already is in a recession.