Gross Domestic Product fell 0.9%, year over year, according to the advance estimate, the Bureau of Economic Analysis reported Thursday. That follows a contraction in the first quarter of 1.6%, as the number underperformed the Dow Jones estimate for a 0.3% gain. That is the second straight quarter in which economic activity contracted, meeting a widely held criteria marking the onset of a recession.
The official determination of whether the economy has entered a recession or not falls to the National Bureau of Economic Research, however it is believed they will take months to render an official verdict, based on a wider set of economic criteria.
Mark Zandi, chief economist at Moody’s Analytics said, “We’re not in recession, but it’s clear the economy’s growth is slowing. The economy is close to stall speed, moving forward but barely.”
Markets had no reaction to the news. Government bond yields were mostly down, with the biggest decline at the shorter-duration end of the curve.
In a separate report released Thursday, it was shown layoffs remain elevated. Initial jobless claims were 256,000 for the week ending on July 23rd, a drop of 5,000 from the upwardly revised level of the week before, but above the Dow Jones estimate of 249,000.
The decline in GDP was due to a number of factors, among them decreases in inventories, residential and non-residential investment, as well as federal, state, and local government spending. For the three month period, gross private domestic investment dropped 13.5%.
Personal Consumption Expenditures increased just 1% for the period as inflation picked up steam. Spending on Services rose by 4.1%, but nondurable goods dropped 5.5%, and durable goods spending was down 2.6%.
Inventories dragged 2% from the total.
Inflation was the underlying factor dragging the economy down. The Consumer Price Index rose 8.6% for the quarter. That was the fastest pace since the fourth quarter of 1981. As a result, inflation-adjusted after-tax personal income dropped 0.5%, and the personal spending rate declined 5.2%, from 5.6% in Q1.
Of the report, Zandi said, “It really was to script. The only encouraging thing was that inventories played such a large role. They won’t play the same role in the coming quarter. Hopefully, consumers keep spending and businesses keep investing and if they do we’ll avoid a recession.”
Jim Baird, chief investment officer at Plante Moran Financial Advisors said, “Recent economic data may not paint a consistent picture, but a second consecutive negative quarter for GDP provides further evidence that, at best, economic momentum continued its marked slowdown. The path for the Fed to raise interest rates without pushing the economy into recession has become exceptionally narrow. There’s a growing possibility that it may have already closed.”
Most economists suspect after looking at a wider range of criteria, the NBER will not declare a recession off of these numbers despite the two consecutive quarters of economic contraction. However the nation has not seen two consecutive quarters of negative growth without being in a recession since 1948.
However Wall Street’s concern is things may still be declining and the recession now might be inevitable, even if the economy just barely slipped the measure this time.
As for the public, it may already have a verdict. 65% of registered voters, including 78% of Republicans, say the economy already is in a recession, according to a Morning Consult/Politico poll earlier this month.
