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 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 look for some clarity in the current economic environment.
The negative decline shown in Thursday’s first reading of second-quarter GDP activity (data to be revised twice more) was driven primarily by a decline in inventory levels. Companies in recent quarters have tried to replenish stocks depleted during the pandemic and, as they try to adjust to supply chain disruptions, have found themselves with excess inventory at a time when consumers have withdrawn some purchases Therefore, the investments made in inventories during the second quarter were lower than in the first quarter.
“The overall conclusion is that the economy is slowing down, and that’s what [Federal Reserve] vol,” said Ryan Sweet, who heads 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 been adamant that the economy more world’s largest economy, despite decades of high inflation and a cascade of supply shocks, remains fundamentally sound.
The administration even took the unusual step of issuing an explanation of sorts, arguing that two consecutive quarters of economic contraction do not, by themselves, constitute a recession. The White House published a blog post last week saying that in addition to GDP, data on the labor market, corporate and personal spending, output and income go into the official determination of a recession. The nonprofit National Bureau of Economic Research is the official arbiter of recessions, and it’s unlikely to issue a verdict anytime soon. The group’s business cycle appointments committee typically weighs a large amount of statistics over a period of months before making a determination.
“They have a much tighter definition: It’s broad and persistent weakness in the economy,” Sweet said. “And that’s not broad-based. It’s really concentrated in inventories and trade; trade was a big drag on GDP in the first quarter.”
Also, the job market is doing well, he said. Monthly job gains topped 450,000 in the first six months of this year, according to the Bureau of Labor Statistics. However, while these gains are moderating, as expected, jobless claims have also increased in recent weeks.
On Thursday, the latest weekly jobless claims data from the BLS showed that first-time claims for jobless benefits were about 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. 261,000.
“Jobless claims are definitely up from their cyclical lows,” Sweet said. “I think that’s more a reflection of an economy shifting into a 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 likely will change. Subsequent revisions to the first-quarter GDP numbers, for example, changed from an initial 1.4% drop to 1.6%, and Thursday’s numbers 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. According to the Federal Reserve Bank of San Francisco, about one-third of initial GDP releases are based on extrapolations and statistical assumptions in the absence of hard data.
“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 it 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 sank by an annualized -8.4%, indicating a much deeper recession than the initial estimate of the – 3.8%
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 usual trade flows.
“What you’re starting to see and hear a lot about right now is what’s happening with inventory…Inventory is a problem, both in terms of the mix of inventory that retailers have and the amount,” he said. said Freedman.
The rush to load goods in the previous two quarters was a miscalculation for businesses like department stores. Walmart and Target have told investors they expect to cut prices to move products. But from a macroeconomic perspective, some experts think these errors imply that the economy in the first quarter was not as anemic as the drop in GDP might imply.
Anna Rathbun, chief investment officer at CBIZ Investment Advisory Services, suggested the 1.6% GDP contraction in the first quarter was artificially low because companies started stockpiling inventory in the final quarter of the year past That boosted economic activity that would otherwise have occurred in the first few months of this year, he said.
“The fourth quarter, for me, it was a little bit bloated,” Rathbun said. “Everybody was just hoarding stuff.”
Also, when companies import more and export less, that dynamic weighs on GDP, said Jacob Kirkegaard, senior research 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 widening. In that sense, a growing trade deficit remains to GDP.” he said, especially when combined with wild price swings.
“When there are very fluctuating commodity prices, and especially in periods of high inflation in general, it can be misleading and, in my view, paint too negative a view of where the economy is,” Kirkegaard said. “We have to be careful to say that the GDP figure is the absolutely valid metric for economic well-being in 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.”