US Q2 GDP fell 0.9%, economy may have entered recession – BEA

Stefan Baumgarten

28-Jul-2022

HOUSTON (ICIS)–US real gross domestic product (GDP) decreased at an annual rate of 0.9% in Q2, following a 1.6% decrease in Q1, the Bureau of Economic Analysis (BEA) said on Thursday in an advance estimate of Q2 GDP trends.

Although the BEA did not use the term recession, the Q2 data indicates that the economy entered into a technical recession, which is defined a two consecutive quarters of negative growth.

ICIS senior economist Kevin Swift said the Q2 weakness was largely centred on inventory change, residential investment and government spending.

Inventories were an issue as retailers and others stocked up for demand that apparently did not develop as anticipated, Swift said.

Residential investment came off due to higher mortgage interest rates and the loss of affordability, he said.

Business investment went from a strong contributor in 1Q to a drag in 2Q, as it eased slightly.

Consumer spending slowed as well, but was still positive.

Offsetting this was a turnaround from a negative 1Q contribution to a positive 2Q contribution in net exports of goods and services, Swift said.

Regarding discussions about using the word “recession” – or the “R” word – Swift said that “there will be years of debate” as to what Thursday’s Q2 GDP release means.

“And plenty of ink will be spilled in papers, analyses, etc,” he said.

While a common definition of recession is two quarters of negative GDP growth, the proper definition is something else, he said, pointing to the definition by the National Bureau of Economic Research (NBER).

“Using that definition – and it’s what I’ve always used – it appears that we are not in recession,” Swift said.

“We can’t say the recession started in the first quarter; the four indicators that the NBER uses were all largely positive, even into the second quarter,” he said.

Only time and more data will tell whether the data indicating recession are pronounced, pervasive and persistent, he said.

“We aren’t there yet. If we are in recession, and I caution with a strong ‘if’, a case could be made of a peak in June. Again, only time and data will tell,” he said.

“That said, our ICIS leading business barometer peaked in February and is now signalling conditions consistent with recessions in the past,” he added.

BEA said that the Q2 decline in real GDP reflected decreases in:
– private inventory investment,
– residential fixed investment,
– federal government spending,
– state and local government spending,
– and nonresidential fixed investment.

Those decreases were only partly offset by increases in exports and personal consumption expenditures (PCE).

Imports, which are a subtraction in the calculation of GDP, increased.

Real GDP: Percent change from preceding quarter

BEA made the following points on Q2 GDP trends:
– The decrease in private inventory investment was led by a decrease in retail trade (mainly general merchandise stores as well as motor vehicle dealers).
– The decrease in residential fixed investment was led by a decrease in “other” structures (specifically brokers’ commissions).
– The decrease in federal government spending reflected a decrease in non-defense spending that was partly offset by an increase in defense spending.
– The decrease in non-defense spending reflected the sale of crude oil from the Strategic Petroleum Reserve (SPR), which results in a corresponding decrease in consumption expenditures.
– Because the oil sold by the government enters private inventories, there is no direct net effect on GDP.
– The decrease in state and local government spending was led by a decrease in investment in structures.
– The decrease in non-residential fixed investment reflected decreases in structures and equipment that were mostly offset by an increase in intellectual property products.
– The increase in imports reflected an increase in services (led by travel).
– The increase in exports reflected increases in both goods (led by industrial supplies and materials) and services (led by travel).
– The increase in PCE reflected an increase in services (led by food services and accommodations as well as health care) that was partly offset by a decrease in goods (led by food and beverages).

The smaller 0.9% decrease in Q2, compared with Q1’s 1.6% decrease, reflected an upturn in exports and a smaller decrease in federal government spending that were partly offset by larger declines in private inventory investment and state and local government spending, a slowdown in PCE, and downturns in nonresidential fixed investment and residential fixed investment. Imports decelerated, relative to Q1.

Real GDP: Percent change from preceding quarter

BEA will update the Q2 GDP estimate in a second estimate, based on more complete data, due to be released on 25 August.

Please also visit the ICIS Recession Watch topic page.

Thumbnail shows US money. Image by Al Greenwood.

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