Don’t Count Your Recessions Before They Hatch?
As expected, today’s preliminary Q2 GDP reading showed that the economy contracted by 0.9% YoY, following a 1.6% decline in the first quarter.
Given this is the second quarter of negative growth, the economy has technically entered a recession.
The reason we say technically is two-part.
The preliminary GDP numbers are usually a bit wonky and require a lot of revision, so we won’t have an accurate reading for a few months; and
The definition of a recession is apparently up for debate these days.
The first reason has a lot more weight to it, given that the U.S. economy is enormous and getting an accurate reading on it takes time. Additionally, it’s hard (and kind of pointless) to argue rules of thumb. Everyone’s got their own opinion on it these days.
The NBER’s “traditional definition” is “…a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” That’s essentially the definition Powell deferred to yesterday in his press conference.
So instead of relying on shortcuts to define a recession, let’s look at the data.
The preliminary report showed decreases in the following areas: private inventory investment, residential fixed investment, federal government spending, state and local government spending, and nonresidential fixed investment.
And increases in the following areas: exports, personal consumption expenditures (PCE), and imports.
The PCE price index increased 7.1% (same as Q1) and 4.4%, excluding food and energy prices. However, real disposable personal income dropped 0.50%, as did personal savings by about 3%.
This data shows that consumers continue to spend, but inflation is definitely taking a bite out of their wallets, which is important given that consumer spending represents 70% of GDP.
So overall, business/government investment is falling, and inflation is pressuring consumer spending.
Not a great look overall.
Whether you agree that today’s data confirmed a recession or not, the Federal Reserve has told us they will continue to slow growth until inflation comes down meaningfully. As a result, financial conditions will remain tight and will get tighter as they continue to raise rates through the end of the year (and potentially into the next).
As such, the meaningful question remains not if we’re in a recession but rather how weak growth will get and how long it will last.
We’ll have to wait and see, but it isn’t looking great for the global economy. Just today, China omitted mention of a GDP growth goal, instead aiming for ‘best possible’ results.
That doesn’t sound too optimistic coming from the world’s largest economy…but you can draw your own conclusions.
it’s hard and kind of pointless to argue rules of thumb, Everyone got their own opinion on it these days.