2 consecutive quarters of decline in GDP: is the US economy in a recession?

In July 2022, the Bureau of Economic Analysis reported a decline in the US economy’s real GDP at an annual rate of 0.9 per cent in the Q2 (second quarter), after a 1.6 per cent decline in the Q1 (first quarter). Does it mean the US economy is in a recession?

The business investment has declined. The government deficit and the national debt are growing rapidly. Inflation is becoming a serious problem, and interest rates are rising sharply.

What do these facts mean for the citizens of the USA? We will look into a few important aspects of Biden’s economy to gauge if the recession is in the corner. Keep reading.

What does a negative GDP number mean for the US economy?

GDP, the Gross Domestic Product, is the most common measure of a country’s economic health. It is the total market value of all goods and services produced within a country’s borders in a given period.

The GDP number is expressed in dollar terms and calculated as the sum of three components – Consumption, Investment, and Government Spending (net). GDP has a direct and immediate impact on employment, wages, and living standards. GDP growth above 2% is considered normal and desirable.

GDP growth below 2% raises fears of a recession. GDP negative growth, usually due to a significant decline in economic activity, is a sign of a serious economic crisis.

Is the US economy heading for a recession in 2022?

There is a great deal of emphasis on the data released in the next two months because Powell offered little specific guidance.

The households and businesses are already feeling the heat of the recession.

There is no doubt that the economy is slowing down, that prices are rising at a pace not seen in decades, and that the housing market is beginning to cool down as the Fed raises interest rates aggressively.

Is President Biden going wrong on the economy? Is the US economy on the right path?

Even though the inflation rate has not yet exceeded 10%, the stakes for the Fed and the Biden administration are particularly high on this issue, especially before the congressional elections in November.

The White House officials are acutely aware that the country is on the edge of a recession, where Americans struggle financially as the midterm elections approach. Many people are already taking it on the chin due to a variety of rising costs and inflation running at a multi-decade high.

Recognising that inflation, which was recorded at 9.1% year-on-year in June, is “unacceptably high”, U.S. President Joe Biden argued that the numbers are outdated and that gas prices have decreased in July.

Despite his resistance, Biden stated that the issue of inflation is his biggest priority. It is a significant liability for Democrats as the congressional elections approach.

According to Fed chair Jerome Powell, behind the headline numbers on GDP, the economy’s fundamental components provide a more optimistic view of the path and prospects.

An excerpt of Jerome Powell’s speech on the US economy at a conference:

• During the first half of 2022, employment grew rapidly, rising by 2,740,000, or 1.8 per cent
• The job boom is not yet over. The average number of job openings in the past six months was 11,500,00 per month.
• In the first and second quarters of 2022, real consumer spending rose 1.8 per cent and 1 per cent, respectively. That was slower than the previous year, but nothing like the first two quarters of the 1990–91 and 2007–09 recessions, when real consumer spending shrank.
• The BEA report for the second quarter shows that real fixed business investment declined at a 0.1 per cent rate. That’s not yet worrying. By comparison, real fixed business investment increased by 3.5 per cent in the second quarter of 2021 if measured against it.

Recently, the senate majority leader Chuck Schumer tweeted about the Inflation Reduction Act. Few important points:

• This act will relieve the American people in negotiating prescription drug prices for the first time.
• It also denotes that the senate democrats will ensure the wealthiest individuals and biggest corporations pay their fair share.
• Under the Inflation reduction act, no small business or family earning less than $400,000 will be affected by the Inflation Reduction Act, which prevents tax increases.

The Current Situation of the US Economy

High Inflation, Fed Interest rate hike, Fear of Recession – The factors dragging the US economy down.High Inflation, Fed Interest rate hike, Fear of Recession – The factors dragging the US economy down.

Lack of adequate investment

Low Residential Investment: A glance at the data reveals that $370 billion in economic activity has been “missing” from residential investment, which is 49% lower than expected based on historical data.

This finding indicates that housing was a major factor in the economic downturn. However, if housing simply returned to its regular position in the economy, 38% of the output gap would be eliminated.

Low Business Investment: The sluggish growth is partially due to the decline in corporate investment. Business spending on equipment and software is down $174 billion in a healthy economy, missing $174 billion in economic activity.

A further $69 billion is lost as a structured investment is down. Spending on equipment and software was one of the most worrisome signals in Friday’s GDP report as it stopped rising in the third quarter, after having risen the last two years. Factory orders provide fresh information indicating that this part of the economy’s gap may widen.

High Inflation

Declining Consumer Spending on Durable goods: The decline in spending on durable goods such as automobiles, furniture, and major appliances is 18% lower than what it would be in a healthy economy, contributing $267 billion to the output gap. Debt and tighter credit continue to be a pain for most Americans;

Rising Consumer Prices: The government reported that U.S. consumer prices, CPI rose 8.5% in March 2022 from a year earlier, the greatest jump in more than 40 years. All food CPI increased 1.0% from May 2022 to June 2022, and food prices were 10.4% higher than in June 2021.

Please note that as reported on 12 Aug 2022, the July inflation data is showing positive signs as it declined to 8.5%

Interest Rate hike

Interest rate hike: The Federal Reserve raised its benchmark lending rate by a quarter percentage point (75 bps), citing weakening economic data. Following the earlier increases in March, May, and June 2022, higher interest rates have pushed the central bank’s overnight rate from near zero to a range of 2.25%-2.50%.

Inverted Yield Curve: The yield on a 10-year U.S. Treasury bond sank below that of a two-year Treasury bond on Wednesday, which last occurred in 2007. (It rebounded slightly later in the day.)

Recession Fear

Output Gap in production: There is a huge output gap in terms of the expected and actual production of the United States.

Consecutive Quarters of negative growth: With negative growth for the second quarter, the GDP report illustrated that businesses had scaled back. In all likelihood, borrowing has become more expensive as the Federal Reserve has raised rates. Consequently, there is less cash to invest. The main issue is whether this will begin to negatively affect job growth.

Strong labor Market: The job market has continued to display signs of strength, and employment is part of the group’s calculations. The economy added 372,000 jobs in June, keeping the unemployment rate at 3.6%%, near its pre-epidemic low.

In June, the job market in the United States surprised everyone when employment increased by 372,000, and several sectors vied for dominance.

According to the Labor Department, health care and social assistance experienced the greatest job increase, adding nearly 78,000 jobs.

Data Source: The Washington Post, Washington Monthly and other public resources.

Bottom line: We do not know yet if there will be a recession in 2022

An economic slowdown will likely be preceded by various indicators alerting us to the change. A negative GDP number signifies economic weakness but is not necessarily an indicator of a recession. GDP numbers are backwards-looking, and the actual health of the economy is reflected in current data.

A sudden drop in GDP, however, should be a wake-up call that something is wrong and that action must be taken to rectify it. A negative GDP number is a warning light that should not be ignored.

Finally, we cannot be certain if the American economy is in a recession until the National Bureau of Economic Research announces it.

Frequently Asked Questions (FAQs)