(CNN) –– The US economy contracted again in the second quarter, the Bureau of Economic Analysis reported Thursday.
Gross domestic product (GDP), a powerful gauge of economic activity, fell 0.9% on an annualized basis from April to June. That reduction marks a key threshold for the most widely used — albeit unofficial — definition of a recession: two consecutive quarters of negative economic growth.
This highly anticipated figure has taken on outsized importance as investors, policymakers and Americans alike seek some clarity in today’s confusing economic environment.
Biden: “It was not a surprise”
Although the initial estimate for this Thursday marks a sharp drop compared to the 6.7% expansion registered by the United States economy in the second quarter of 2021, the White House has remained firm that the country, despite being suffering the highest inflation in decades, it remains fundamentally sound.
Along these lines, President Joe Biden said in a statement that the GDP result for the second quarter “was not a surprise.” “After last year’s historic economic growth –– and the recovery of all private sector jobs lost during the pandemic crisis–– it’s no surprise that the economy is slowing as the Federal Reserve moves to reduce inflation. Biden said in a statement.
Previously, the government even took the unusual step of publishing an explanation of sorts, noting that two consecutive quarters of economic contraction do not, in and of themselves, constitute a recession. The White House published a blog post last week saying that in addition to GDP, data related to the labor market, corporate and personal spending, output and income are included in the official determination of a recession.
The news of the contraction in GDP comes just one day after the Federal Reserve took the historic step of raising interest rates again by 0.75%. “The labor market is extremely tight and inflation is too high,” Fed Chairman Jerome Powell said in explaining the decision. This unprecedented action underscores the extent to which the central bank is willing to boost the economy to moderate the rising costs that Americans are suffering. Right in the middle of the highest price increases since the 1980s.
Are we facing a recession in the US economy?
The National Bureau of Economic Research, a nonprofit organization, is the official arbiter of recessions. And it is unlikely that he will deliver a verdict any time soon. A committee within the group is tasked with evaluating a plethora of statistics over a period of several months before making a decision.
Some economists point out that the main reason why it would be premature to declare a recession on the GDP figure alone is that the data can and probably will change. For example, subsequent revisions to the figures for the first quarter changed from an initial drop of 1.4% to 1.6%. In that sense, Thursday’s numbers correspond only to the first of three estimates.
Adjustments are the norm rather than the exception, as the Commerce Department repeatedly refines its calculations as new information becomes available. In fact, roughly one-third of initial GDP releases are based on assumptions and statistical extrapolations due to a lack of hard data, according to the Federal Reserve Bank of San Francisco.
“Usually these are single points in time, snapshots. It’s almost like looking at a balance sheet versus an income statement for a quarter,” said Eric Freedman, chief investment officer at US Bank Wealth Management.
“New information can emerge,” he said, and when it does, those variables change the outcome.
Sometimes the differences between the estimates are significant. Revisions to GDP in the fourth quarter of 2008, for example, revealed that economic activity slumped by -8.4% annualized. Which indicated a much deeper recession than the initial estimate of -3.8% suggested.
“Inventories are a problem”
Right now, the biggest thing keeping economists from getting a clear picture is the build-up of inventories. As well as the corresponding imbalance in the usual commercial flows of the country.
“What you’re starting to see and hear a lot about right now is what’s going on with inventories… Inventories are an issue, both in terms of the mix of inventory that retailers have as well as quantity,” Freedman explained. .
The rush to stockpile products over the previous two quarters was a miscalculation by companies like big box retailers. Walmart and Target have told investors they hope to cut prices so they can move products. But from a macroeconomic perspective, some experts believe those missteps imply that the economy in the first quarter was not as anemic as falling GDP might show.
Anna Rathbun, chief investment officer at CBIZ Investment Advisory Services, suggested the 1.6% contraction in first-quarter GDP was artificially low because companies started stockpiling inventory in the final quarter of last year. This boosted economic activity that would otherwise have occurred in the first few months of this year, she said.
“The last quarter, for me, was a little bit bloated,” Rathbun said. “Everyone was hoarding stuff.”
Trade deficit, something to watch closely in the US economy
Also, if companies import more and export less, that dynamic weighs on GDP, said Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics.
“It’s the value of production within the physical borders of the United States. So if you have, hypothetically, exports that are flat and imports that are higher, then your trade deficit is increasing. In that sense, a growing trade deficit subtracts of GDP,” especially when combined with sharp swings in prices, he explained.
“When commodity prices fluctuate a lot, and especially in periods of high inflation in general, it can be misleading. And, in my opinion, paint too negative a view of where the economy is,” Kirkegaard said. “We have to be careful about saying that the GDP figure is the absolutely valid metric for the economic well-being of the country.”
Federal Reserve Chairman Jerome Powell on Wednesday reiterated the importance of considering several key economic measures as the central bank determines future rate moves. However, Powell said the first reading of a GDP report should be scrutinized.
Alicia Wallace of CNN Business contributed to this report.