US 2nd Quarter GDP – What did we Learn From Today’s Reading?

GDP: -0.9

Following a negative GDP reading in the first quarter, a strong but inflation-impacted economy expanded in the second quarter on a nominal basis, but contracted in real inflation-adjusted terms. 

BEA reported “Real gross domestic product decreased at an annual rate of 0.9 percent in the second quarter of 2022, following a decrease of 1.6 percent in the first quarter. The smaller decrease in the second quarter primarily reflected an upturn in exports and a smaller decrease in federal government spending.”

Despite a strong labor market and consumer spending during the first half of the year, this is the second consecutive quarter of real (Inflation-adjusted) economic contraction. Nominal GDP is plus 7.8% annualized, but that is due mostly to the post-pandemic surge in prices.

What does this mean for investors?

Recessions matter to investors because they greatly reduce employment, cut consumer spending, lower corporate revenues, and ultimately drag earnings down.

On top of that is the sentiment impact, which affects equity multiples. Lower earnings and lower multiples wreak havoc on investor portfolios.

There are essentially two kinds of bear markets: (1) Recessionary and (2) Non-Recessionary. The non-recessionary bear markets fall ~25% on average, while the recessionary bear markets get hit much harder at 39%.

*Note these are averages, and they have a broad dispersion 20% to 33% for the typical bear markets to a much deeper range during recessions of 20% to 86%.

The bad news is we are stuck with debating the meaning of 2 consecutive quarters of negative GDP as a Recession for three more months. The good news is this lowers expectations for the FOMC going 75 basis points in September. Market reaction was almost non-existent, suggesting a slowdown or even a mild recession is already priced in.

GDP Items and Key Points

The data below is provided by Rick Davis at the Consumer Metrics Institute.

GDP Items 

• Consumer spending for goods was reported to be contracting at a -1.08% rate, down 1.01 percentage points (pp) from the prior quarter. 
• The headline contribution for commercial/private fixed investments was reported to be -0.72%, down a material 2.00 pp from the prior quarter. 
• Inventories subtracted -2.01 pp from the headline number, down 1.66 pp from the prior quarter. It is important to remember that the BEA’s inventory numbers are exceptionally noisy (and susceptible to significant distortions/anomalies caused by commodity pricing or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series. 
• The contribution to the headline from governmental spending was reported to be -0.33%, up 0.18 pp from the prior quarter.
• Imports subtracted -0.49% annualized ‘growth’ from the headline number, up 2.20 pp from the prior quarter. 
• Foreign trade contributed a net 1.43 pp to the headline number. 
• Real per-capita annualized disposable income was reported to have decreased by $79 quarter to quarter. 
• The annualized household savings rate was 5.2% (down 0.4pp from the prior quarter). In the 56 quarters since 2Q-2008 the cumulative annualized growth rate for real per-capita disposable income has been 1.15%. 

Key Points 

• For this estimate the BEA assumed an effective annualized deflator of 8.86%. During the same quarter the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was higher at 11.02%. Under estimating inflation results in optimistic growth rates, and if the BEA’s nominal data was deflated using CPI-U inflation the headline growth number would have been -3.18%. 
• Consumer spending on goods moved deeper into contraction, with the growth rate for all consumer spending declining by about a half percent. 
• Commercial spending on fixed investment also began to contract, primary due to weakening residential construction. 
• Real household income and savings rates continued to shrink. The consumer is in no position to quickly reverse the course of the headline number. 

Changing Definition?

Janet Yellen’s Response

Treasury Secretary Janet Yellen on Thursday suggested the U.S. economy is not in a recession, despite new figures that showed two consecutive declines in gross domestic product.

Most economists define a true recession as involving a “broad-based weakening of the economy” including substantial job losses, business closures and a decline in private sector activities, Yellen said during a press conference in Washington, D.C.

“That is not what we’re seeing right now,” she said.

Yellen on Thursday reiterated that inflation remains too high and that bringing it down is a top priority for President Biden. She suggested that prices are “likely to come down in the days ahead.” Reducing inflation could cause the unemployment to tick higher, but she maintained the labor market will remain strong.

“This is a very unusual situation where we have a slowdown, but the labor market remains very tight,” Yellen said. “We could see some mild easing of pressures in the labor market yet continue to feel we’ve got a good strong labor market that’s operating in full employment.”

There Was No Definition Change

Sorry, there was no definition change. Countless people on Twitter made the same baseless claim.