The U.S. economy contracted again in the second quarter, the Bureau of Economic Analysis said Thursday.
Gross domestic product, a broad measure of economic activity, fell 0.9% on an annualized basis from April to June. This decline marks a key symbolic threshold for the most commonly used – albeit unofficial – definition of a recession as two consecutive quarters of negative economic growth.
The much-awaited data release has taken on outsized importance as investors, policymakers and everyday Americans seek some clarity in the current confusing economic environment.
The negative decline shown in Thursday’s first reading of second-quarter GDP activity – data that will be revised twice more – was mainly due to lower inventory levels. In recent quarters, businesses have tried to replenish stocks depleted during the pandemic – and in trying to adapt to the disruption in the supply chain, they found themselves overstocked at a time when consumers withdrew some purchases . Investments in inventories during the second quarter were therefore lower than in the first quarter.
“The general conclusion is that the economy is slowing down, and that is what [Federal Reserve] wants,” said Ryan Sweet, who leads real-time economics at Moody’s Analytics. “We are not in a recession.
Although Thursday’s initial estimate marked a steep decline from the 6.7% expansion the economy experienced in the second quarter of 2021, the White House was adamant that the largest economy world, despite being rocked by decades-long high inflation and a cascade of supply shocks, remains fundamentally sound.
administration even took the unusual step of releasing some kind of explanation, saying that two consecutive quarters of economic contraction do not, in and of themselves, constitute a recession. The White House released a blog entry last week saying that in addition to GDP, labor market data, business and personal spending, production and income all go into the official determination of a recession.
The nonprofit National Bureau of Economic Research is the official arbiter of recessions, and he is unlikely to deliver a verdict anytime soon. The group’s business cycle dating committee typically assesses a plethora of statistics over a period of months before making a decision.
“They have a much stricter definition: it’s widespread and persistent weakness in the economy,” Sweet said. “And it’s not widespread. It’s really concentrated in inventories and in trade – trade was a big drag on first quarter GDP.
Moreover, the labor market is doing well, he said. Monthly job gains averaging more than 450,000 in the first six months of this year, according to the Bureau of Labor Statistics. However, while those gains are moderating, as expected, the past few weeks have also seen jobless claims rise.
The latest weekly jobless claims data from the BLS on Thursday showed that first jobless claims were estimated at 256,000 for the week ending July 23. This total is 5,000 below the previous week’s level, which was revised up by 10,000 requests to 261,000.
“Unemployment claims have definitely risen from their cyclical lows,” Sweet said. “I think it’s more a reflection of an economy shifting into lower gear.”
Economists say the main reason it would be premature to call a recession based on Thursday’s numbers is that the data can and probably will change. Subsequent revisions to first-quarter GDP figures, for example, have moved from an initial decline of 1.4% to 1.6%, and Thursday’s figures are just the first of three estimates.
Adjustments are the norm rather than the exception, as the Commerce Department repeatedly refines its calculations as new information becomes available. About a third of early GDP releases rely on extrapolations and statistical assumptions in the absence of reliable data, according to Federal Reserve Bank of San Francisco.
“It’s usually single points in time, snapshots. It’s almost like looking at a balance sheet versus a quarterly income statement,” said Eric Freedman, chief investment officer at US Bank Wealth Management.
“New information can emerge,” he said, and when that happens, those variables change the outcome.
Sometimes the differences between the estimates are significant. GDP revisions in the fourth quarter of 2008, for example, revealed that economic activity had actually plunged -8.4% on an annualized basis, indicating a much deeper recession than the initial estimate of -3.8%. suggested.
Right now, the biggest blemish on target preventing economists from getting a clear picture is a buildup of inventories and a corresponding imbalance in the country’s usual trade flows.
“What you’re starting to see and hear a lot right now is what’s going on with inventory…Inventory is an issue, both in terms of the mix of inventory that retailers are holding as well as the amount,” Freedman said.
A rush to load goods in the previous two quarters was a miscalculation for businesses like big box stores. walmart and Target both told investors they expected to cut prices to move products. But from a macro perspective, some experts believe these missteps imply that the economy in the first quarter was not as anemic as the drop in GDP might otherwise imply.
Anna Rathbun, chief investment officer at CBIZ Investment Advisory Services, suggested the 1.6% contraction in GDP in the first quarter was artificially weak because companies started building up inventories in the final quarter of last year. This pushed forward economic activity that would otherwise have taken place in the early months of this year, she said.
“The fourth quarter, for me, was a little bloated,” Rathbun said. “Everyone was hoarding stuff.”
Additionally, when firms import more and export less, that dynamic weighs on GDP, said Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics.
“It’s the value of production within the physical borders of the United States, so if you have, hypothetically, exports that are stable and imports that are higher, then your trade deficit increases. In that sense, a growing trade deficit subtracts from GDP,” he said, especially when combined with wild swings in prices.
“When commodity prices fluctuate wildly, and particularly during times of high inflation in general, it can be misleading and, in my view, cast too negative a view of the economic picture,” Kirkegaard said. “We have to be careful saying that the GDP figure is the absolutely valid measure of economic well-being in the country.”
Federal Reserve Chairman Jerome Powell on Wednesday reiterated the importance of considering various key economic measures as the central bank determines future rate moves. However, Powell said the first reading of a GDP report should be taken “with a grain of salt”.