U.S. G.D.P. Report: G.D.P. Report Shows U.S. Economy Shrank Again (Published 2022) (2024)

Here are the highlights from today’s report.

The top-line number for U.S. gross domestic product is a composite of positive and negative forces, and the details matter:

  • Consumer spending, which powers the majority of the economy, rose 1 percent on an annualized basis, a marked slowdown from previous months as purchases of goods declined and spending on services grew only moderately.

  • Home construction, also referred to as residential fixed investment, sagged 14 percent at an annual rate under the weight of rising interest rates, which have put mortgages beyond the reach of more would-be home buyers.

  • Inventories, which measure the amount of stuff that’s been produced or imported but not yet sold, depressed the overall number by more than two percentage points on an annual basis. Companies still added to their inventories in the second quarter, but more slowly than in the first, which dragged down overall growth.

  • Business construction, known as fixed investment in nonresidential structures, dove by 11.7 percent on an annual basis, as construction of factories and warehouses — also an interest rate-sensitive sector — slowed.

  • Federal government spending shrank 3.2 percent on an annual basis, as stimulus money continues to fade out and oil was released from the Strategic Petroleum Reserve, although defense spending grew 2.5 percent as military aid flowed to Ukraine.

  • Final sales to domestic purchasers, which some economists favor as a metric that cuts out volatile inventories and government spending, sank 0.3 percent.

    (All the figures are reported on a seasonally adjusted basis.)

Lydia DePillis

New data fans concern about a U.S. recession.

U.S. G.D.P. Report: G.D.P. Report Shows U.S. Economy Shrank Again (Published 2022) (1)

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A key measure of economic output fell for the second straight quarter, raising fears that the United States could be entering a recession — or perhaps that one had begun.

Gross domestic product, adjusted for inflation, fell 0.2 percent in the second quarter, the equivalent of an 0.9 percent annual rate of decline, the Commerce Department said Thursday.

The 0.2 percent decline followed a contraction of 0.4 percent in the first three months of the year — meaning that by one common but unofficial definition, the U.S. economy has entered a recession a mere two years after it emerged from the last one.

Most economists still don’t think the economy meets the formal definition of a recession, which is based on a broader set of indicators including measures of income, spending and employment. The G.D.P. data itself will also be revised several times in the months ahead.

Still, the data released on Thursday left little doubt that the recovery is losing momentum amid high inflation and rising interest rates. Business investment and construction activity both fell in the second quarter after rising in the first. Consumer spending, adjusted for inflation, remained positive but slowed. After-tax income fell after adjusting for inflation.

“We don’t think we’re in a recession just yet,” said Aditya Bhave, senior economist for Bank of America. “But the bigger point here is that the underlying trend in domestic demand is weakening. You see a clear deceleration from the first quarter.”

A deceleration, on its own, isn’t necessarily bad news. The Federal Reserve has been trying to cool off the economy in a bid to tame inflation, and the White House has argued that the slowdown is part of an inevitable and necessary transition to a period of steadier growth after last year’s rapid recovery.

“Coming off of last year’s historic economic growth — and regaining all the private sector jobs lost during the pandemic crisis — it’s no surprise that the economy is slowing down as the Federal Reserve acts to bring down inflation,” President Biden said in a statement issued after the G.D.P. report. “But even as we face historic global challenges, we are on the right path and we will come through this transition stronger and more secure.”

Still, forecasters in recent weeks have become increasingly concerned that the Fed’s aggressive moves — including raising interest rates three-quarters of a percentage point on Wednesday for the second month in a row — will result in a recession. There are hints that layoffs are picking up and that consumers are struggling to keep pace with rapidly rising prices.

“The job market doesn’t have to turn around that much in order for us to have a recession,” said Tim Quinlan, senior economist for Wells Fargo.

Ben Casselman

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Treasury Secretary Yellen said the U.S. economy was transitioning to ‘steady, sustainable’ growth.

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U.S. G.D.P. Report: G.D.P. Report Shows U.S. Economy Shrank Again (Published 2022) (3)

President Biden and Treasury Secretary Janet L. Yellen on Thursday dismissed questions about whether the U.S. economy was already in a recession, pointing to the strong labor market and other metrics as signs of its health.

Ms. Yellen, speaking at a news conference at the Treasury Department, said that she did not believe the U.S. was in a recession, arguing that the labor market and household balance sheets remain strong despite slowing growth.

Mr. Biden, speaking at the White House, said that while the economy was slowing, “we see signs of economic progress as well.” The president pointed to comments on Wednesday by Jerome H. Powell, the Federal Reserve chair, who said he did not think the U.S. was currently in a recession.

“And the reason is there are just too many areas of the economy that are performing too well,” Mr. Powell said.

The comments came as disappointing economic data raised fears that the economy could soon enter a downturn, if it is not there already. The Fed made another large interest rate increase on Wednesday as it tries to tame inflation, which is likely to cool the economy further.

Commerce Department data released on Thursday showed that gross domestic product, adjusted for inflation, fell 0.2 percent in the second quarter, the equivalent of a 0.9 percent annual rate of decline.

The 0.2 percent decline followed a contraction of 0.4 percent in the first three months of the year — meaning that by one common but unofficial definition, the U.S. economy has entered a recession a mere two years after it emerged from the last one.

“In the context of today’s report, it’s important to look beyond the headline number to understand what’s happening,” Ms. Yellen said. “Overall, with a slowdown in private demand, this report indicates an economy that is transitioning to more steady, sustainable growth.”

Ms. Yellen said that recessions were usually marked by substantial job losses and family budgets that are under significant strain. She argued that business and consumer spending and industrial output remain strong.

The Treasury secretary added that the global economy was facing numerous risks that could affect the United States’ economic outlook, pointing to Russia’s war in Ukraine, lockdowns in China and supply chain disruptions.

Ms. Yellen acknowledged that inflation remains too high and that taming it was the Biden administration’s top priority.

“We simply haven’t seen anything like this since the 1970s, and seeing what’s happening to food prices and energy prices and rent and other prices in the economy is making families very concerned about their household budgets,” Ms. Yellen said.

She also expressed support for the proposed climate and tax legislation that Senate Democrats unveiled on Wednesday evening, suggesting that it would help ease inflation. The bill aims to reduce prescription drug costs and provide expanded tax credits for electric vehicles while raising taxes on large companies and ramping up enforcement of the tax code.

“These efforts are long overdue, and Congress should pass it immediately,” Ms. Yellen said.

Alan Rappeport

Consumer spending continues to shift from goods to services.

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The second consecutive quarterly decline in the gross domestic product was made possible, in part, by the anemic level of consumer spending.

“Even though we’ve been pleased with the resilience of consumers, it’s been a sharp slowdown,” said Diane Swonk, chief economist for KPMG.

Consumer spending grew by 0.3 percent, or 1 percent on an annualized basis, a rate that Ms. Swonk called “a crawl.” Over the last three quarters, the increase had averaged 2.1 percent on an annualized basis.

The figures are adjusted for both seasonal factors and inflation.

Economists have been looking for a pickup in services spending to offset an inevitable decline in goods spending as consumer patterns gradually reset from the pandemic. That happened in the second quarter, with spending on services growing 4.1 percent on an annualized basis, but not enough to prevent a significant slowdown.

“We believed the pivot would be enough to keep us all good, and the reality is it’s not enough because inflation is so high,” Ms. Swonk said.

From an inflation-fighting perspective, however, it might be a welcome trend.

Red-hot increases in prices of goods like cars and home furnishings resulted from a combination of supply chain bottlenecks and surging demand as Americans bought things with money they couldn’t spend on travel and other services during the pandemic. A decrease in demand will be crucial to keeping those prices in check — and make the Federal Reserve’s job somewhat easier.

Digging into the tables reveals an interesting dichotomy: The biggest increases in spending on services came partly from food in the form of hotels and restaurants, which added 0.6 percentage points to the annualized G.D.P. number. The biggest decrease in spending also came from food, in the form of groceries and meals meant to be eaten at home, which subtracted 0.65 percentage points from growth.

Spending on health care also increased, adding 0.4 percentage points to the annual rate of economic growth.

Ben Casselman contributed reporting.

Lydia DePillis

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Markets react by placing bets on a less aggressive Fed.

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Following the weaker than expected G.D.P. data, investors added to bets that the prospect of a recession will push the Federal Reserve to rein in its campaign of fighting inflation through higher interest rates.

The two-year Treasury yield, which is sensitive to changes in investor expectations for further rate increases, slumped by as much as 0.19 percentage points, its biggest move lower since mid-June. The slide eased in midday trading, with the yield ending the day around 0.13 percentage points lower.

“The growing skepticism that the Fed will continue to deliver aggressive tightening has been emboldened by this morning’s numbers,” Ian Lyngen, an interest rate strategist at BMO Capital Markets, wrote in a note.

Investors now expect the Fed to push its target interest rate up to around 3.2 percent by the end of the year, down from an expectation of around 3.6 percent earlier this month. Lower interest rates are generally seen as beneficial for companies, with higher interest rates increasing their costs and reducing profits.

The S&P 500 index added to its big rally on Wednesday. After an early dip the index rose 1.2 percent.

Joe Rennison

The economy is growing in dollars, but not keeping up with inflation.

The U.S. economy is sending complicated and sometimes conflicting signals right now. But in some ways, the situation is simple: Americans are earning and spending more money than ever, but prices are rising even faster.

U.S. households took in $4.6 trillion in after-tax income in the second quarter, 1.6 percent more than in the first three months of the year. But consumer prices rose 1.7 percent, meaning that incomes, adjusted for inflation, actually fell.

It was a similar story across the economy. Businesses invested more in absolute dollars, but cut back once inflation is taken into account. Consumer spending did rise faster than prices, but barely. And total economic output, adjusted for inflation, fell for the second straight quarter, despite accelerating without adjustment.

That dynamic helps explain why the Federal Reserve is moving so aggressively to raise interest rates and slow the economy down. Inflation reflects, in part, that demand — for goods, services, equipment, workers — outstrips supply. By raising the cost of borrowing money, the Fed hopes to bring down demand, and with it, inflation.

There are signs that is already happening. The housing market slowed markedly in the second quarter, and business investment has also stalled; those sectors are among the most sensitive to rising interest rates.

But inflation isn’t merely a result of domestic forces. Oil prices rose sharply this year after Russia’s invasion of Ukraine. China’s efforts to contain the spread of the coronavirus have added to supply-chain disruptions. The Fed can’t control those dynamics. Nor can it do anything to bring workers back to the job market or otherwise help the supply side of the domestic economy.

The risk is that, in trying to control inflation, the Fed will slow demand so much that companies start laying off workers, unemployment rises sharply and the economy falls into a recession. Jerome H. Powell, the Fed chair, acknowledged that risk on Wednesday, saying that the path to avoiding a recession had “narrowed” even as he expressed hope that a downturn could still be avoided.

“We’re not trying to have a recession and we don’t think we have to,” he said. “We think there’s a path for us to be able to bring inflation down while sustaining a strong labor market.”

Ben Casselman

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The report is a snapshot of the economy, not the last word on recession.

There’s one thing that the second-quarter report on gross domestic product did not tell us, definitively: whether the United States is in a recession.

The National Bureau of Economic Research is the semiofficial arbiter of when recessions begin and end. Its Business Cycle Dating Committee tries to be definitive, which means it typically waits as much as a year to declare that a recession has begun, long after most independent economists have reached that conclusion.

In other words, even if we are already in a recession, we might not know it — or, at least, might not have official confirmation of it — until next year.

Economists sometimes use two consecutive quarters of shrinking gross domestic product as a shorthand definition of a recession. It is a reasonable rule of thumb: G.D.P. measures total economic output, adjusted for inflation, and if it falls for six months, it’s likely the economy is in a recession.

But the National Bureau of Economic Research defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” What that means is that the downturn can’t be isolated to one or two sectors, like housing or technology, and it has to be severe and long — although there is some wiggle room. The collapse in economic activity in the first months of the pandemic was so broad and so severe that the bureau declared it a recession even though it lasted only two months.

The bureau does consider G.D.P. in making its determinations. But it puts more weight on a range of other indicators, including income, spending and job growth.

Figuring out whether a recession is happening in real time is hard. Economists often disagree. But it is usually clear in hindsight, which is why the dating committee waits so long — typically as much as a year — to make its pronouncements.

Ben Casselman

Climate change is probably a drag on growth, but it’s unclear how much.

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It’s been hot out there. Like water-main-breaking, train-slowing, corn-scorching, road-buckling hot — not to mention heat’s effects on human bodies, making it harder to work in construction and harvest crops.

All of that must be playing into the gross domestic product reading for the second quarter, right?

The short answer is yes. The longer answer is that it’s very hard to track that impact in real time, but economists are working on doing it better.

For more than a decade, researchers have constructed forecasts of climate change’s likely economic impact. A 2018 paper found, for example, that the annual growth rate of state-level economic output declined 0.15 to 0.25 percentage points for every degree the average temperature crept higher in the summer — which could take up to a third off economic growth over the next century. And that’s just in the United States.

Those estimates, however, benefit from long-term data sets that allow analysts to compare the effects of temperature and extreme weather events over time. They also tend to project further into the future, which generally yields more eye-popping outcomes, and is more relevant for evaluating the effects of policy interventions meant to curb emissions.

“As a profession, we’ve been really focused on future economic impacts from climate change, because we’ve been focused on how you should be taxing carbon emissions,” said Derek Lemoine, an associate professor of economics at the University of Arizona. “We’ve been less focused on what climate change is doing already, partly because we didn’t realize it would happen this quickly.”

But Dr. Lemoine is working on doing exactly that, with the goal of estimating how climate change is affecting the economy at nearly the same time that statistics like G.D.P. are being compiled.

Other researchers are working on developing measures of economic growth that integrate not just production of goods and services — which themselves can accelerate climate change — but environmental and social elements as well.

Lydia DePillis

U.S. G.D.P. Report: G.D.P. Report Shows U.S. Economy Shrank Again (Published 2022) (2024)

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