Last week the Department of Commerce released their first estimate of 2nd Quarter GDP and they reported the economy contracted .9%. JP Morgan, one of the Portfolio Strategists we utilize for client accounts, in their weekly market recap today gave their perspective about what is behind the numbers and whether this means we are already in a recession…
Real GDP fell 0.9% in the second quarter, marking the U.S. economy’s second straight quarter of decline. Weakness was broad based with slowdowns in inventory rebuilding, residential and non-residential construction and capital spending. This was marginally offset by gains in consumer spending and trade; however, with higher inflation eroding Americans’ purchasing power, higher mortgage rates slowing down the housing market and a higher US dollar hurting exports, growth is likely to stay subdued this year.
While two consecutive quarters of negative GDP growth may lead some to jump to the term “recession”, we are not there yet according to the definition used by the National Bureau of Economic Research (NBER), the de facto scorekeepers of U.S. recessions. NBER’s definition is much broader, encompassing declines in employment, industrial production, household income and trade. Take employment as the prime example here. In the second quarter, we saw average non farm payroll growth of 375K a month while the unemployment rate held at 3.6%. This strong of a labor market seems to contradict NBER’s definition. However, it will be important to monitor the labor market in the second half of 2022 to look for any signs of deterioration and the possible start of a recession.
While the gloomy GDP print will reinforce pessimism concerning the health of the U.S. economy, it does present a slight silver lining. The growth slowdown in the first half of 2022 shows that the Fed’s aggressive hiking cycle is delivering on its intended consequences – higher rates are slowing demand and growth, which should help alleviate some inflationary pressure in the second half of 2022.