The Bureau of Economic Analysis (BEA) released their advanced estimate of second-quarter Gross Domestic Product (GDP) today. GDP is an estimate of the total value of goods and services produced in an economy. The BEA estimated that real GDP decreased at an annual rate of 0.9 percent in the second quarter after shrinking at a rate of 1.6 percent in the first quarter. This shows that economic growth has stagnated in the first half of 2022 after rising rapidly during 2021 as the economy was recovering from the pandemic.
Since two consecutive quarters of GDP growth is sometimes considered to put an economy in a recession, does this report mean that we have now entered another recession? Not necessarily. In the United States, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) determines if the economy is in recession. The NBER states that a recession “involves a significant decline in economic activity that is spread across the economy and lasts more than a few months.” In determining if the economy is in recession, they will look to more than a single economic indicator and frequently do not announce recessions until after the fact as they take a retrospective approach in determining business cycle dates once data is available.
If the economy is determined to be in a recession, it would be a strange one given the strength of other economic indicators. First, the labor market remained strong during the first half of the year. The economy has added a significant number of jobs each month and the unemployment rate has declined by 0.3 percentage points to 3.6 percent since December. The expanding labor market is not consistent with an economy in recession. Moreover, individual consumption expenditures remain strong, although they flattened in May. As long as consumers remain willing to spend and employment continues to grow, it is unlikely that we are in a recession.
Given the strength in other indicators, the reductions in GDP over the past two quarters have potentially been due to changes in the timing of production as the economy recovers from the pandemic. The decline in first quarter GDP was primarily due to firms reducing their inventories, which could have been due to ongoing pandemic disruptions. Moreover, in both quarters there has been a reduction in government spending as additional government spending from pandemic stimulus bills declines. Finally, inflation has played an important role as nominal GDP grew rapidly at 7.8 percent. The reduction in real GDP reflects the high rates of inflation that are reducing real incomes.
While the economy has had two consecutive quarters of negative real GDP growth, much of the economy remains strong and we may not be in a recession. However, the economy may still experience a mild recession as the federal reserve continues to raise interest rates to combat high rates of inflation. It will be useful to follow how the mixed economic signals work themselves out over the second half of the year.
