US economy contracts again, fueling recession fears

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Gross domestic product, a broad measure of economic activity, fell 0.9% on an annualized basis from April to June. That decline marks a key symbolic threshold for the most widely used, though unofficial, definition of a recession as two consecutive quarters of negative economic growth.

The long-awaited data release has taken on outsized importance as investors, policymakers and ordinary Americans seek some measure of clarity in today’s 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 a decline in inventory levels. In recent quarters, companies have tried to replenish stocks that ran out during the pandemic, and as they tried to adjust to supply chain turmoil, they found themselves overstocked at a time when consumers pulled back. of some purchases. Therefore, the investments made in inventory during the second quarter were lower than those of the first quarter.

“The general moral is that the economy is slowing down, and that’s what [Federal Reserve] wants,” said Ryan Sweet, who runs real-time economics at Moody’s Analytics. “We’re not in a recession.”

Although Thursday’s initial estimate marked a sharp drop from the 6.7% expansion the economy experienced in the second quarter of 2021, the White House has remained adamant that the world’s largest economy, despite being battered by decades of high inflation and a cascade of supply shocks, it remains fundamentally sound.

If it looks like a recession and squawks like a recession...
The administration even took the unusual step of publishing an explanation of sorts, maintaining that two consecutive quarters of economic contraction do not, in and of themselves, constitute a recession. The White House published a blog post last week saying that in addition to GDP, data related to the labor market, corporate and personal spending, output and income are included in the official determination of a recession.
The nonprofit National Bureau of Economic Research is the official arbiter of recessions, and is unlikely to deliver a verdict any time soon. The group’s Business Cycle Dating Committee typically weighs a plethora of statistics over a period of months before making a decision.

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 the first-quarter GDP figures, for example, changed from an initial drop 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 initial GDP releases are based on extrapolations and statistical assumptions in the absence of hard data, according to the Federal Reserve Bank of San Francisco.

“Usually these are single points in time, snapshots. It’s almost like looking at a balance sheet versus an income statement for a quarter,” said Eric Freedman, chief investment officer at US Bank Wealth Management.

“New information can emerge,” he said, and when it does, those variables change the outcome.

Sometimes the differences between the estimates are significant. Revisions to GDP in the fourth quarter of 2008, for example, revealed that economic activity actually slumped by -8.4% annualized, indicating a much deeper recession than the initial estimate of -3.8%. suggested.

Right now, the biggest blemish on the lens preventing economists from getting a clear picture is the build-up of inventories and the corresponding imbalance in the country’s usual trade flows.

“What you’re starting to see and hear a lot about right now is what’s happening with inventories… Inventories are an issue, both in terms of the mix of inventory that retailers have and the quantity,” Freedman said. .

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The rush to load products over the previous two quarters was a miscalculation for companies like big box stores. walmart Y Target has told investors they expect to cut prices to move products. But from a macroeconomic perspective, some experts believe those missteps imply that the economy in the first quarter was not as anemic as falling GDP might imply.

Anna Rathbun, chief investment officer at CBIZ Investment Advisory Services, suggested the 1.6% contraction in first-quarter GDP was artificially low because companies started stockpiling inventory in the final quarter of last year. This boosted economic activity that would otherwise have taken place in the first few months of this year, she said.

“The fourth quarter, for me, was a little bloated,” Rathbun said. “Everyone was hoarding stuff.”

Also, when companies import more and export less, that dynamic weighs on GDP, said Jacob Kirkegaard, a 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 flat and imports that are higher, then your trade deficit is increasing. In that sense, a growing trade deficit subtracts from GDP,” he said, particularly when combined with sharp swings in prices.

“When commodity prices fluctuate a lot, and especially in periods of high inflation in general, it can be misleading and, in my opinion, paint an overly negative view of where the economy is,” Kirkegaard said. “We have to be careful about saying that the GDP figure is the absolutely valid metric for the economic well-being of the country.”

Federal Reserve Chairman Jerome Powell on Wednesday reiterated the importance of considering several 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”.

This story is developing and will be updated.

Alicia Wallace of CNN Business contributed to this report.

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