Real GDP contracted by 0.9% quarter-over-quarter (annualized) in the second quarter of 2022. The reading came in below the consensus forecast, which called for a modest gain of 0.4% q/q.
Consumer spending grew by 1% – a deceleration from the 1.8% recorded in Q1. Spending on services (4.1%) accounted for all the gains, while durable (-2.6%) and non-durable (-5.5%) expenditures both declined. As a result, goods spending fell by 4.4%, and has now recorded declines in two consecutive quarters.
Non-residential business investment (-0.1%) was essentially flat on the quarter, as continued gains in intellectual property products (9.2%) were offset by declines in equipment (-2.7%) and structures (-11.7%) spending. Structures investment has now contracted for five consecutive quarters, and is down over 7% since the Q1-2021.
Residential investment (-14.0%) fell sharply in Q2, as home construction slowed and sales of new and existing homes fell by over 12% on the quarter.
Government spending (-1.9%) declined for the third consecutive quarter, on lower spending at both the federal (-3.2%) and state & local (1.2%) level. In terms of federal spending, gains in defense (2.5%) outlays were more than offset by a sharp decline in non-defense (-10.5%) spending.
Exports surged by 18% in the second quarter, with gains spread across both the exports of goods (15.6%) and services (24.2%). Imports recorded a more modest gain of 3.1% – a marked deceleration from the near 20% growth seen in each of the prior two quarters. This led to some narrowing in the trade deficit, resulting in net trade adding 1.4 percentage points (pp) to Q2 growth.
Inventory investment sharply declined in the second quarter – subtracting 2 pp from headline growth.
The core PCE deflator rose 4.4% on a q/q (annualized) basis – a noticeable deceleration from the 5.2% recorded in Q1.
Key Implications
With the advance estimate of second quarter GDP coming in negative, US economic growth has now recorded two consecutive quarters of contraction – meeting one definition of a “technical” recession. However, most economists would agree that the US economy isn’t (yet) in recession. Outside of just economic growth, the National Bureau of Economic Research (NBER) looks at a whole host of other economic indicators including employment, industrial production, and real personal disposable income (less transfers) to name a few. All of these continue to point to an economy still in expansionary territory.
That being said, domestic demand has shown a clear sign of decelerating. Consumer spending continued to soften in the second quarter, while both business and residential investment outright declined. And it doesn’t appear that growth prospects will be improving anytime soon. Measures of both consumer and business sentiment have turned decisively lower in recent months, ISM readings have softened, while weaker pending home sales point to further declines in home purchases in the months ahead.
In its interest rate announcement yesterday, the FOMC acknowledged the recent softening in economic data, but reiterated that more interest rate hikes will likely be required to cool inflation. With the policy rate now in the vicinity of neutral – the interest rate where monetary policy is neither accommodative nor restrictive – its entirely feasible that the we see another 100 basis points of tightening by year-end.
