The US economy is contracting again, fueling recession fears

Gross domestic product, a wide-ranging measure of economic activity, declined by 0.9% year on year from April to June. That decline marks a key symbolic threshold for the more commonly used, albeit unofficial, definition of recession as two consecutive quarters of negative economic growth.

The highly anticipated release of the data has taken on immense significance as investors, policymakers and ordinary Americans seek some clarity in the current confusing economic environment.

The negative decline shown in Thursday’s first reading on second-quarter GDP activity – data to be revised two more times – was mainly driven by a decline in inventory levels. Businesses over the past few quarters have tried to replenish stocks that ran out during the pandemic and, in an effort to adapt to the supply chain disruption, have found themselves overloaded at a time when consumers have withdrawn some purchases. Investments in inventory made in the second quarter were therefore lower than in the first.

“The overall result is that the economy is slowing down, which is why [Federal Reserve] wants, “said Ryan Sweet, who leads the real-time economy at Moody’s Analytics.” We’re not in a recession. “

Although Thursday’s initial estimate marked a steep drop from the 6.7% expansion the economy underwent in the second quarter of 2021, the White House was adamant that the largest economy in the world, despite being hit by decades of high inflation and a cascade of supply shocks, it remains fundamentally healthy.

If it looks like a recession and charlatans like a recession ...
The administration has also taken the unusual step of publishing some sort of explanation, arguing that two consecutive quarters of economic contraction do not, in and of themselves, constitute a recession. The White House released a blog post last week stating that in addition to GDP, data related to the labor market, business and personal spending, manufacturing and incomes all go into 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 appointments committee typically evaluates a plethora of statistics over a period of months before making a decision.

“They have a much stricter definition: it’s a broad and persistent weakness in the economy,” Sweet said. “And that doesn’t have a broad basis. It’s really concentrated in stocks and trade – trade was a big drag on first quarter GDP.”

Furthermore, the job market is doing well, he said. According to the Bureau of Labor Statistics, monthly job earnings are averaging over 450,000 in the first six months of this year. However, while these earnings are moderating, as anticipated, jobless claims have also increased in recent weeks.

On Thursday, the BLS’s latest weekly jobless claims data showed first-time jobless claims were around 256,000 for the week ending July 23. The total is 5,000 below the previous week’s level, which was revised up by 10,000 requests to 261,000.

“Jobless job demands have significantly increased from their cyclical lows,” Sweet said. “I think it’s more of a reflection of an economy that is downshifting.”

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 data, for example, have moved 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 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 statistical extrapolations and assumptions in the absence of hard data, according to the Federal Reserve Bank of San Francisco.

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

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

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

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

“What you are starting to see and hear a lot about right now is what’s going on with inventory … Stocks are an issue, both in terms of the mix of stocks that retailers are holding as well as the amount. “said Freedman.

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The rush to load goods during the previous two quarters was a miscalculation for companies like big-box stores. Walmart and Target have both told investors they expect to cut prices to move products. But from a macroeconomic perspective, some experts believe these missteps imply that the economy in the first quarter was not as anemic as declining GDP might otherwise imply.

Anna Rathbun, chief investment officer of CBIZ Investment Advisory Services, suggested that the 1.6% contraction in first-quarter GDP was artificially low as companies began building inventories in the final quarter of last year. This led to an economic activity that would otherwise have taken place earlier this year, she said.

“The fourth quarter, for me, was a bit swollen,” Rathbun said. “Everyone was just piling things up.”

Also, when companies import more and export less, that dynamic weighs on GDP, said Jacob Kirkegaard, a researcher at the Peterson Institute for International Economics.

“It’s the value of production within the physical boundaries of the United States, so if you have, hypothetically, flat exports and higher imports, your trade deficit is increasing. In this sense, a growing trade deficit is subtracted from GDP,” he said, particularly when combined with wild price swings.

“When you have highly fluctuating commodity prices, and especially in times of high inflation in general, then it can be misleading and, in my opinion, paint an overly negative view of where the economy is,” Kirkegaard said. “We must be careful to say that the number of GDP 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 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”.

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