November 27, 2022

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US economy contraction in the first half of 2022, confirms updated GDP

US economy contraction in the first half of 2022, confirms updated GDP

Numbers: The US contracted in the first six months of the year, revised government figures confirm, painting a picture of an economy reeling from strong headwinds and tailwinds.

The Bureau of Economic Analysis said Thursday that gross domestic product, the economy’s official scorecard, fell 0.6% year-on-year in the second quarter. This is unchanged from the previous estimate.

Meanwhile, the previously reported 1.6% decline in first-quarter GDP was also unchanged.

The newly revised numbers were revealed as part of the government’s annual process of adjusting data for the previous five years based on new information.

Some economists have speculated that the revised numbers could show growth rather than contraction. Instead there has been very little change.

Political supporters debated whether the United States had slipped into recession before a pivotal fall election in which control of Congress is at stake. An old but unofficial rule of thumb defines a recession as two consecutive quarters of negative GDP.

However, while growth in the US has clearly slowed, the strongest job market in decades indicates that the economy is still in expansion mode. Companies are hiring, layoffs at a record low and the unemployment rate is nearing the lowest level since the 1960s.

In any case, the debate may already be moot. The US economy is facing stronger headwinds this fall and another recession may be on the horizon.

The Big Picture: The updated GDP numbers offer a slightly clearer view of what has happened to the economy since the pandemic, but they don’t tell us anything about the future. The future looks bleaker.

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While the third quarter is likely to show the economy expanding again, the latest forecasts show that a storm is brewing as 2023 approaches.

The Federal Reserve is rapidly raising borrowing costs to stem high inflation, but its aggressive strategy is also expected to slow the economy and increase unemployment. Many economists even predict a second recession in four years.

Key details: Consumer spending accounts for up to 70% of US economic activity and expenditures were somewhat stronger than previously reported in the first half of the year.

Spending rose at an inflation-adjusted annualized pace of 2% in the second quarter and 1.3% in the first.

What caused the GDP contraction was a record trade deficit, the end of most pandemic stimulus, and a sharp drop in business spending, especially on new inventories.

The biggest surprise in the report was the drop in so-called gross domestic income – mainly wages and profits.

Growth in income – the flip side of spending – was revised down in the second quarter to 0.1% from 1.4% previously. Income growth also fell to 0.8% in the first quarter from 1.8%.

Many economists had suspected that GDP was actually stronger in the first half of the year than the government had previously reported due to income gains. Higher income usually means higher spending.

Incomes did not rise as much as previously estimated, but perhaps due to higher inflation. High price pressures wiped out most of the income gains.

I look ahead: “Consumers are holding up well, even with inflation rising, and the labor market is still very strong,” said chief economist Jos Foucher of PNC Financial Services. “But there is a real possibility that the Fed may overdo it, sending the US economy into a recession in the first half of 2023.”

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market reaction: Dow Jones Industrial Average

DJIA,
-1.48%
and the S&P 500 SPX,
-2.04%
It is scheduled to open lower on Thursday.