Thursday’s gross domestic product report confirmed what many economists had already suspected.
This important economic indicator fell by 0.2% in the second quarter (annualized to -0.9%) – and since the U.S. economy also retracted at the beginning of the year, the country is in what is considered the informal definition of a recession.
It’s worth noting that only the National Bureau of Economic Research can officially declare whether or not the U.S. is actually in a recession.
That’s because, while the GDP has fallen two quarters in a row, there are other factors at play when it comes to the entire economic picture, which the NBER incorporates into its own assessment of possible recessions.
“The economy is tepid, it’s treading water, basically,” said Stephan Weiler, a professor of economics at Colorado State University, co-director of CSU’s Regional Economic Development Institute and a former Federal Reserve research officer. “It’s hard to get a feel for what direction we’re headed in, since even though business investment, construction, and government spending are declining, consumer spending and job growth remain relatively strong.”
That’s why Weiler cautions against using “recession” to describe the current economic situation in the U.S. Here’s a look at what he took out of the GDP report, and what he’ll be watching in the common months.
Stephan Weiler, a professor economics at CSU, cautioned against saying the U.S. is in a recession.
The GDP report isn’t set in stone
A 0.2% decline is significant, but not massive, which is why Weiler says revisions to the GDP report in late August and September could tip the scale in another direction.
To put the size of the GDP fluctuations into context, he pointed to a graph from the Bureau of Economic Analysis illustrating the U.S. economy’s growth and declines since 2018.
Courtesy U.S. Bureau of Economic Analysis
“When you look at the bigger picture, this report is definitely a relatively small blip,” Weiler said.
Will the Fed continue to raise interest rates?
The day before the GDP report was released, the Federal Reserve once again raised interest rates by 0.75% – something Weiler said was expected by many economists. In fact, he said he wouldn’t have been surprised had the Fed raised rates by as high as 1%.
“The Fed is focused on getting inflation down, and the 9% rate of inflation that we’re at right now is high and they’ve got to do something about it,” Weiler said.
The goal of raising interest rates is to cool the economy and to fight inflation, but Weiler said it might be too early to determine if the Fed is responsible for this quarter’s GDP decline or if other factors are at play.
Consumers are continuing to buy services, but are slowing down on purchasing actual goods
Weiler said the U.S. GDP is unique in that whether it grows or contracts is based nearly 70% on the consumer.
“The reason we’re getting this tepid growth right now is because consumers themselves are confused,” Weiler said.
In the most recent report, consumption of services – like eating out at restaurants, going to hotels and spending money on travel – went up, but Weiler said spending on items like food at the grocery store declined.
“You can understand why because inflation is making your bagels and your cheese and everything else go up in price, and consumers look at that and say ‘maybe not’ when all the sudden these items cost more,” Weiler said.
Weiler said each of these individual decisions sum up the GDP, and that if prices start stabilizing, consumer spending on goods could increase. In a related report on earnings, real earnings – thus taking out inflation – have been fairly steadily dropping since the beginning of the year, which underscores the expensive consequences of living in a high-inflation economy.
The travel industry is continuing to grow
Weiler said according to the latest U.S. GDP report, exports have actually increased.
“That’s surprising given how strong the U.S. dollar is,” Weiler said.
The reason why? Weiler said it’s partially because exports include travel to the U.S., and large numbers of people are visiting the country and spending their money here.
Conversely, imports are also on the rise, and that number is impacted by the large numbers of U.S. travelers headed overseas. Part of the reason for these increasing numbers might be the fact that people are beginning to live with COVID-19 and are traveling more than they did two years ago.
“COVID is becoming just part of life, and with that, people are traveling more, among other activities,” Weiler said.
Today’s headlines could impact the broader economic picture
Weiler said consumers tend to become far more cautious when they see the word “recession” on the front page of every news website.
“If enough economists say it’s a recession, people will act like it’s a recession, which is why I’m being careful with my wording today and am using the word ‘tepid,’” Weiler said. “Again, the job growth is good, nominal wages are still rising, but things like investment and government spending are down, and so we are just sort of playing it even.”