U.S. gross domestic product (GDP) — arguably the biggest, most closely watched economic measure there is — fell for the second consecutive quarter in 2022, according to the report released Thursday morning by the Bureau of Economic Analysis.
After sliding 1.6 percent earlier this year, GDP dropped another 0.9 percent in the second quarter. The culprits? A drop in residential fixed investment, private inventory investment, and federal spending, to name just a few causes, which were somewhat offset by a boost in exports.
Conventional wisdom says that this isn't good, and for a long time, most Econ 101 textbooks said that two straight quarters of GDP decline meant your economy was in a recession.
Today, however, the definition is more flexible, and a not insignificant number of economists say that the jury is still out on whether the U.S. is officially experiencing a recession. Among those cautioning that we should be careful about throwing around the R-word is the nation's top banker.
"We're not trying to have a recession, and we don't think we have to," Federal Reserve Chair Jerome Powell said Wednesday after announcing another three-quarter percent rate hike.
The statement didn't stop reporters from peppering Powell with questions about his thoughts on the chances of one, but the Fed chair stuck to his guns, arguing that many economic fundamentals remain strong.
President Joe Biden was similarly cool-headed about the latest GDP drop, pointing out that, all things considered, the U.S. economy was performing pretty well.
"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," he said. "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."
Echoing Powell and other optimists, he added that unemployment remains historically low at 3.6 percent and that at least one million jobs were created in the second quarter alone.
The president, of course, is in the business of making people feel good about the economy that they're in charge of. So, what is it that economists are saying about the fall in GDP?
Too Soon to Call
Stephen Miran, the co-founder of Amberwave Partners and former senior adviser for economic policy at the Department of the Treasury, told Cheddar that it's clear the economy is starting to slow down, but that he wouldn't go so far as calling it a recession.
"I don't believe we're in a recession at the moment, and the principal reason is because the weakness in the economy has been pretty narrow," he said.
He explained that a big chunk of the decrease came from a drop in inventories, which tend to be extremely volatile in the short-term but end up evening out in the long run.
A concrete example of this played out earlier in the week, as Walmart said its profits would take a hit in the coming quarter due to markdowns designed to clear out excess inventory. Target is also dealing with this issue, and according to the GDP report, it's an economy-wide challenge.
Miran said companies are paying the price for stockpiling earlier in the pandemic when a combination of federal stimulus and a shift in spending from services to durable goods led to a consumer boom that forced retailers to stock up or face shortages.
The report also showed a fall in business investment, particularly in residential construction, which tracks with reports from earlier this week that new home sales are dropping. As many have pointed out, the housing market is the most sensitive to Federal Reserve rate hikes, so as financial conditions tightened, mortgage rates shot up, and home buying cooled.
"The downturn in investment, which subtracted 2.7 percentage points from GDP growth this quarter, is the most worrying part of the report," Miran said. "About a quarter of that was the downturn in housing construction."
Worker Benefits
On the upside, the report showed further evidence that workers are seeing gains, despite the slowdown. Current dollar personal income increased by $353.8 billion in the second quarter, compared with $247.2 billion in the first quarter, in large part due to a boost in worker compensation. In addition, real disposable personal income, which accounts for inflation, fell just 0.5 percent, compared with a 7.8 percent fall last quarter.
David Andolfatto, an economist who is currently on leave from the St. Louis Federal Reserve, noted that gross domestic income (GDI) — another popular measure of economic activity — was actually positive in the first quarter, which could suggest GDP is missing something.
"Just based on basic accounting, the GDP and GDI should be the same number," he said. "They're just different ways of measuring the same variables, and if there's any discrepancy, it's a purely statistical discrepancy."
Even if we do take the numbers at face value, he added, putting them in historical context is crucial to not overreacting.
"The main takeaway is that people should be careful," he said. "We're not talking about the kind of deep recession we saw in 2008."
