August 14, 2022

GDP: The US economy is shrinking again, fueling recession fears

GDP: The US economy is shrinking again, fueling recession fears

Gross domestic product, a broad measure of economic activity, fell 0.9% year-on-year from April through June. This downturn represents a major symbolic limit to the more popular – albeit unofficial – definition of a recession as two consecutive quarters of negative economic growth.

The highly anticipated data release has gained in importance as investors, policy makers and ordinary Americans seek some clarity in the current turbulent economic environment.

The negative drop seen Thursday in the first reading of Q2 GDP activity – data that will be revised two more times – was mostly driven by lower inventory levels. Companies in recent quarters have tried to replenish stocks pulled during the pandemic — and in an effort to cope with supply chain disruptions, they have found themselves overwhelmed as consumers back off some purchases. Thus, investments in inventory during the second quarter were lower than in the first quarter.

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

Although Thursday’s initial estimate represented a sharp drop from the 6.7% expansion the economy experienced in the second quarter of 2021, the White House was adamant that the world’s largest economy, despite being hit by decades of high inflation and a series of shocks Display, remains basically intact.

Administration He even took the unusual step of publishing an explanation of sorts, emphasizing that two consecutive quarters of economic downturn do not, in and of themselves, constitute a recession. The White House published a file Blog entry Last week he says that in addition to GDP, data on the labor market, personal and business spending, production and income all go into the official determination of a recession.
Nonprofit National Bureau of Economic Research It is the official arbiter of recessions, A ruling is unlikely any time soon. A group’s business cycle dating committee typically weighs a large number of stats over a period of months before making a decision.

“They have a much stricter definition: It’s a widespread and persistent weakness in the economy,” Sweet said. “And that’s not a broad base. It’s really focused on inventories and trade – trade was a huge drag on first-quarter GDP.”

In addition, the job market is doing well. Monthly Job Gains Averaged more than 450,000 during the first six months of this year, according to the Bureau of Labor Statistics. However, while these gains are moderate, as expected, the past few weeks have also seen an increase in unemployment claims.

On Thursday, the latest weekly jobless claims data from the BLS showed that first-time claims for unemployment benefits were estimated at 256,000 for the week ending July 23. That total is 5,000 below the previous week’s level, which was revised up by 10,000 claims to 261,000.

“Unemployment claims have certainly risen from cyclical lows,” Sweet said. “I think this is more of a reflection of an economy shifting into a lower gear.”

Economists say the biggest reason it’s too early to call a recession based on Thursday’s numbers is because That data can and may change. For example, subsequent revisions to the first-quarter GDP numbers changed from an initial decline of 1.4% to 1.6%, and Thursday’s numbers are only the first of three estimates.

Adjustments are the norm, not the exception, as the Ministry of Commerce frequently revises its accounts as new information becomes available. About a third of primary GDP releases are based on extrapolation and statistical assumptions in the absence of concrete data, according to Federal Reserve Bank of San Francisco.

“These are usually single points in time, snapshots. It’s like looking at the balance sheet versus the income statement for more than a quarter,” said Eric Friedman, chief investment officer at US Bank Wealth Management.

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

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

Currently, the biggest smear on the lens preventing economists from getting a clear picture is the buildup of stocks and the corresponding imbalance in the country’s normal trade flows.

“What I’m starting to see and hear a lot about at the moment is what’s going on with stocks … Inventories are a problem, both in terms of the mix of inventory that retailers hold as well as quantity,” Friedman said.

The Fed is making history with its second massive interest rate hike in as many months
The rush to load merchandise over the past two quarters has been a miscalculation for companies like supermarkets. Walmart And the Target both told investors they expect to cut prices for the transportation of products. But from a macroeconomic perspective, some experts believe that these bumps indicate that the economy in the first quarter was not as weak as the drop in GDP might suggest.

Anna Rathbone, chief investment officer at CBIZ Investment Consulting Services, noted that the 1.6% contraction in first-quarter GDP was artificially low because companies began hoarding inventory in the last quarter of last year. She said this pushed forward economic activity that would otherwise have occurred in the early months of this year.

“The fourth quarter, to me, was a little bloated,” Rathbone said. “Everyone was just stockpiling things.”

Additionally, when companies import more and export less, this dynamic affects GDP, said Jacob Kierkegaard, 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, hypothetically, you have constant exports and higher than imports, your trade deficit goes up. In that sense, the growing trade deficit subtracts from GDP,” he said, particularly when combined with fluctuations severe in price.

“When you have high volatility in commodity prices, especially in periods of high inflation in general, it can be misleading and, in my opinion, paint a very negative view of where the economy is,” Kierkegaard said. “We should be careful when we say that the GDP number is the absolutely correct measure of the country’s economic well-being.”

Federal Reserve Chairman Jerome Powell on Wednesday emphasized the importance of looking at various key economic actions as the central bank determines future interest rate movements. However, Powell said the first reading of the GDP report should be taken “with caution”.