The US economy shrank again in the second quarter, the Bureau of Economic Analysis said Thursday.
Gross domestic product, a wide-ranging measure of economic activity, fell by 0.9% on an annualized basis from April through June. That decline marks a key symbolic threshold for the most commonly used — albeit unofficial — definition of a recession as two consecutive quarters of negative economic growth.
The hotly anticipated data release has taken on outsized significance as investors, policymakers and ordinary Americans seek some measure of clarity in the current muddled economic environment.
The negative dip shown in Thursday’s first read on second-quarter GDP activity – data that will be revised two more times – was driven mostly by a decline in inventory levels. Businesses in recent quarters have tried to replenish stockpiles drawn down during the pandemic – and in trying to adjust for supply chain upheaval, they’ve found themselves overstocked at a time when consumers have pulled back on some purchases. Investments made in inventory during the second quarter were therefore lower than they were in the first quarter.
“The general takeaway is the economy is slowing, and that’s what the [Federal Reserve] wants,” said Ryan Sweet, who leads 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 underwent in the second quarter of 2021, the White House has been adamant that the world’s largest economy, despite being buffeted by decades-high inflation and a cascade of supply shocks, remains fundamentally sound.
The administration even took the unusual step of publishing an explainer of sorts, maintaining that two consecutive quarters of economic contraction does not, in and of itself, constitute a recession. The White House posted a blog entry last week saying that in addition to GDP, data pertaining to the labor market, corporate and personal spending, production 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 it is unlikely to render 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 determination.
“They have a much stricter definition: It’s a broad-based and persistent weakness in the economy,” Sweet said. “And this isn’t broad based. It’s really concentrated in inventories and in trade – trade was a big drag on first-quarter GDP.”
Additionally, the labor market is doing well, he said. Monthly job gains average more than 450,000 through the first six months of this year, according to the Bureau of Labor Statistics. However, while those gains are moderating, as anticipated, the past few weeks have also seen jobless claims increase.
On Thursday, the latest weekly jobless claims data from the BLS showed that first-time claims for unemployment benefits were an estimated 256,000 for the week ending July 23. That total is 5,000 below the previous week’s level, which was revised upward by 10,000 claims to 261,000.
“Jobless claims have definitely moved higher from their cyclical lows,” Sweet said. “I think that’s more of a reflection of an economy shifting into a lower gear.”
Economists say the biggest 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 figures, for instance, changed from an initial drop of 1.4% to 1.6%, and Thursday’s numbers are just the first of three estimates.
Adjustments are the norm rather than the exception, since the Commerce Department repeatedly refines its calculations as new information becomes available. About a third of initial GDP releases rely 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 it does, those variables change the outcome.
Sometimes, the differences between estimates are significant. Revisions to GDP in the fourth quarter of 2008, for example, revealed that economic activity actually plunged by an annualized -8.4%, indicating a much deeper recession than the initial estimate of -3.8% suggested.
Right now, the biggest smudge on the lens preventing economists from getting a clear picture is a buildup 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 inventories… Inventories are an issue, both in terms of the mix of inventory retailers are holding as well as the amount,” Freedman said.
A rush to load up on 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 in order to move products. But from a macroeconomic perspective, some experts think those missteps imply that the economy in the first quarter wasn’t as anemic as the drop in GDP might otherwise imply.
Anna Rathbun, chief investment officer at CBIZ Investment Advisory Services, suggested that the 1.6% contraction in first-quarter GDP was artificially low because businesses started stockpiling inventory in the final quarter of last year. This pulled forward economic activity that otherwise would have taken place in the early months of this year, she said.
“The fourth quarter, to me, was bloated a little bit,” Rathbun said. “Everyone was just hoarding things.”
In addition, 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 therefore if you have, hypothetically, exports that are flat and higher imports, then your trade deficit is rising. In that sense, a rising trade deficit subtracts from GDP,” he said, particularly when combined with wild swings in prices.
“When you have highly fluctuating commodity prices, and especially in periods 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 have to be careful with saying the GDP number is the absolutely valid metric for economic well-being in 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 read of a GDP report should be taken “with a grain of salt.”