US economy contracts again, fueling recession fears

GDP, a broad measure of economic activity, fell 0.9% on an annualized basis from April to June. This decline marks an important symbolic threshold for the most used – albeit informal – definition of a recession as two consecutive quarters of negative economic growth.

The highly anticipated data release has assumed immense importance as investors, policy makers and ordinary Americans seek some degree of clarity in the current tumultuous economic environment.

The negative decline shown on second-quarter GDP activity in Thursday’s first quarter — data that will be revised twice — was mostly driven by a decline in inventory levels. Businesses in recent quarters have tried to replenish stockpiles pulled up during the pandemic – and in an attempt to adjust for supply chain turmoil, they have overstocked themselves at a time when consumers have made some purchases. pulled back on. Therefore, the investment in inventory during the second quarter was lower as compared to the first quarter.

“The usual remedy is that the economy is slowing down, and that’s it” [Federal Reserve] “We are not in a recession,” said Ryan Sweet, who leads real-time economics at Moody’s Analytics.

Although early Thursday forecast showed a sharp decline from the economy’s 6.7% expansion in the second quarter of 2021, the White House is adamant that the world’s largest economy remains stagnant despite being hit by decades of high inflation and supply shocks. Is. Basically healthy.

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The administration also took the unusual step of publishing an interpreter of sorts, ensuring that two consecutive quarters of economic contraction did not constitute a recession. Posted by White House blog entry It said last week that in addition to GDP, data related to the labor market, corporate and personal spending, production and income all go into the official determination of the recession.
Nonprofit National Bureau of Economic Research The official arbiter of recession is, And the verdict is not likely to be delivered any time soon. The group’s business cycle dating committee usually weighs a lot of data over a period of months before making a determination.

Economists say the biggest reason for prematurely calling a recession based on Thursday’s data That data can and probably will change. Subsequent revisions to first-quarter GDP figures, for example, changed from an initial drop of 1.4% to 1.6%, and Thursday’s number is only the first of three estimates.

Adjustments are the norm rather than the exception, as the Department of Commerce frequently refines its calculations as new information becomes available. About a third of the initial GDP release relies on statistical extrapolations and assumptions in the absence of hard data, according to Federal Reserve Bank of San Francisco,

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

“New information may emerge,” he said, and when that happens, those variables change the outcome.

Sometimes, the differences between the estimates are significant. For example, a revision in GDP in the fourth quarter of 2008 showed that economic activity actually fell by -8.4% yearly, indicating a much deeper recession than the initial estimate of -3.8%.

Right now, the biggest blemish on the lens preventing economists from getting a clear picture is the creation of inventories and a similar imbalance in the country’s general trade flows.

“A lot of what you’re starting to see and hear right now is happening with inventory … Inventory is an issue, inventory is the mix of retailers as well as the amount,” Friedman said.

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The rush to load up on goods during the past two quarters was a miscalculation for companies like big-box stores. walmart And Target has both told investors they expect price cuts. To transfer products. But from a macroeconomic perspective, some experts think those missteps mean the economy wasn’t as anemic in the first quarter as it might mean for a fall in GDP.

Anna Rathbun, chief investment officer at CBIZ Investment Advisory Services, suggested the 1.6% contraction in first-quarter GDP was artificially low as businesses began stocking inventory in the last quarter of last year. He said it pushed economic activity which otherwise would have taken place in the early months of this year.

“The fourth quarter, for me, was a little bloated,” Rathbun said. “Everyone was just hoarding.”

In addition, when companies import more and export less, there is a dynamic load on GDP, said Jacob Kierkegaard, a senior fellow at the Petersen 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 high imports, your trade deficit is widening. In that sense, a growing trade deficit exceeds GDP. has decreased,” he said, especially when combined with wild swings in prices.

“When you have extreme volatility in commodity prices, and especially in periods of high inflation in general, it can be misleading and, in my opinion, portray an overly negative view of the economy. does,” Kierkegaard said. “We have to be careful in saying that the GDP number is a perfectly valid metric for economic well-being in the country.”

Federal Reserve Chairman Jerome Powell reiterated on Wednesday the importance of considering a variety of key economic measures as the central bank determines future rate moves. However, Powell said the first reading of the GDP report should be taken “with a grain of salt”.

This story is developing and will be updated.

CNN Business’ Alicia Wallace contributed to this report.

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