US: Economy shrinks in 2022, increasing recession fears

Gross domestic product fell 0.9% year-on-year after falling 1.6% in the first three months of the year. Personal consumption, which constitutes the largest part of the economy, increased by 1%, slowing down from 1.8% in the previous period, as consumers cut discretionary spending due to high inflation. The median forecast was a 0.4% improvement in GDP and a 1.2% increase in consumer spending. The Atlanta Fed model, on the other hand, pointed to a very clear contraction of 1.2%. The US economy also contracted in the second quarter, increasing the chances of a recession as decades of high inflation slashed consumer spending and increases in Fed interest rates hampered business investment and housing demand.

If we look at the sub-items; It seems that consumption contributed 0.7%, investments -2.73%, stock change -2%, net exports +1.73% and the public sector -0.33%. Consumer spending slowed with the decline in goods spending, which normalized compared to the Covid period. GDP data showed that spending on services accelerated by 4.1% year-on-year, while spending on goods decreased by 4.4%. Low consumption of goods was offset by higher spending on services such as travel or entertainment. In addition to the slowdown in household spending, there were also declines in business investment, government spending and housing. There is a 1.9% decrease in public expenditures. Stocks also put downward pressure on GDP as demand cooled and companies liquidated inventories. Exports increased by 18% and imports by 3.1%. Thus, the narrowing trade deficit had a positive impact on the growth account as the goods deficit narrowed to the lowest level of this year in May.

The gauge of core demand, which excludes trade and inventory components — domestic final sales adjusted for inflation — fell 0.3% in the second quarter, compared to a 2% increase in the previous period. Housing investment fell 14% year-on-year, the biggest drop since the start of the pandemic, reflecting how high borrowing costs and rapid inflation have squeezed the housing market. Sales have been falling for months and builders are increasingly pessimistic about future demand. Commercial investment in equipment reflects negative, softening and uncertain economic conditions, as well as ongoing supply bottlenecks, particularly in the automobile sector. Adjusted for inflation, business investment fell 0.1%, reflecting decreases in both construction and equipment spending. Spending on intellectual property products rose solidly.

As a result, while the contribution of net exports turned positive, a more critical slowdown in growth is observed.

US GDP growth development

Real GDP contracted again in 2022. Although the general rule for recessions is two quarters of consecutive declines in GDP, the formal determination of the ends and beginnings of business cycles is made by a group of academics at the National Bureau of Economic Research. In fact, qualitatively, two consecutive quarters of negative GDP growth does not necessarily indicate a recession: the National Bureau of Economic Research (NBER) analyzes the recession based on a set of data. In addition to monthly operating and revenue data, NBER also takes into account quarterly real gross domestic income, which rose 1.8% in the first quarter, even as GDP contracted by 1.6%. Still, the data coming in as negative pressure shows that the risks are leaning firmly down. The report is likely to add to political headaches for Biden and complicate his account of how aggressively the Fed will raise interest rates.

Claims for unemployment benefits last week were higher than forecast, according to other published data. The 4-week averages continue to increase. The first jobless claims indicate that conditions in the labor market are cooling: risks are rising, although the economy is too tight to suggest that it is in a full-blown recession. Retailers such as Walmart Inc. and Target Corp. lowered their profit forecasts and a number of tech companies, including Shopify Inc. have announced plans to lay off workers in recent weeks. Others such as Apple Inc. and Microsoft Corp. are slowing hiring. Broader weakness in a labor market that shows only limited signs of cooling would remove a major source of support for the economy and will shape the course of monetary policy differently this year.

If we look at the Fed’s point of view; Two-year Treasury yields slumped after the report potentially lowered the possibility of more aggressive rate hikes by the Fed. However, this year’s perspective of the FOMC will not change as the model forecasts predict this contraction. Individuals face higher prices for nearly everything, from gas to food to rent. Wages have risen, but not fast enough to keep up with inflation, bringing consumer sentiment to several-year lows. The Fed, on the other hand, is determined to contain inflationary pressures, some of which stem from factors beyond their control, such as Russia’s war in Ukraine.

After a 75 basis point increase in interest rates, Powell said, “We think it is necessary to slow growth. We actually think we need a period of below-potential growth to create some slack for the supply side to catch up. We think there will likely be a softening in labor market conditions”. He said that as more rate hikes approach, the size of the movements will depend on the data, the labor market is extremely tight at the moment and inflation is very high.” We will look at the Fed members’ statements on growth and inflation concerns in the next stage.

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