The US economy is shrinking again as fears of a recession mount

(CNN) — On Thursday, the Bureau of Economic Analysis reported that the US economy contracted again in the second quarter.

Gross domestic product, a strong measure of economic activity, fell 0.9% year-on-year from April to June. This reduction represents a key threshold for the most widely used – albeit unofficial – definition of a recession: two consecutive quarters of negative economic growth.

This prospect has gained in importance as investors, policy makers and Americans alike seek some clarity in today’s confusing economic environment.

Biden: ‘It wasn’t a surprise’

Although Thursday’s initial estimate represented a sharp decline compared to the 6.7% expansion that the US economy recorded in the second quarter of 2021, the White House has remained consistent that the country, despite suffering from the highest rate of inflation in decades, does not It is still basically intact.

In this context, President Joe Biden said in a statement that the second-quarter GDP result “was not surprising.” “After last year’s historic economic growth – and the recovery of all the private sector jobs lost during the pandemic crisis – it is not surprising that the economy has slowed as the Federal Reserve moves to lower inflation,” Biden said in a statement.

(Image source: LUIS ROBAYO/AFP via Getty Images)

Previously, the government took the unusual step of publishing an explanation of some sort, stating that two consecutive quarters of economic contraction do not, in and of themselves, constitute a recession. The White House published a blog post last week saying that in addition to GDP, data on the labor market, personal and business spending, production and income are included in the official recession decision.

The GDP contraction news comes just a day after the Federal Reserve took the historic step of raising interest rates again by 0.75%. “The labor market is very tight and inflation is very high,” said Federal Reserve Chairman Jerome Powell, explaining the decision. This unprecedented measure underscores the central bank’s willingness to boost the economy to ease the mounting costs Americans are experiencing. It is in the middle of the highest price hike since the 1980s.

Are we facing a recession in the US economy?

The National Bureau of Economic Research, a nonprofit organization, is the official arbiter of recessions. He is not likely to pass a ruling any time soon. A committee within the group is tasked with evaluating a large number of statistics over a period of several months before making a decision.

The United States is preparing for a possible recession 2:16

Some economists point out that the main reason it is too early to declare a recession in the GDP number alone is that the data can and probably will change. For example, subsequent revisions to the first quarter numbers changed from an initial decline of 1.4% to 1.6%. In this sense, Thursday’s numbers correspond only to the first three estimates.

Adjustments are the norm rather than the exception, as the Ministry of Commerce frequently revises its accounts as new information becomes available. In fact, about a third of the primary GDP releases are based on assumptions and statistical extrapolation due to a lack of firm data, according to the Federal Reserve Bank of San Francisco.

“These are usually single points in time, snapshots. It’s like looking at the balance sheet versus the income statement for the quarter,” said Eric Friedman, chief investment officer at US Bank Wealth Management.

“New information can emerge,” he said, and when that happens, those variables change the outcome.

Sometimes the differences between the estimates are significant. Revisions to GDP in the fourth quarter of 2008, for example, revealed that economic activity declined by -8.4% year-on-year. Which points to a much deeper recession than the initial estimate of -3.8% had predicted.

“Stocks problem”

Right now, the biggest thing preventing economists from getting a clear picture is the buildup of stocks. As well as the corresponding imbalance in the normal trade flows of the country.

“What I’m starting to see and hear a lot about now is what’s going on with stocks … Inventories are a problem, both in terms of the mix of inventory that retailers have as well as quantity,” Friedman explained.

The rush to stockpile products over the past two quarters has been a miscalculation by companies such as large retailers. Walmart and Target told investors they hope to lower prices so they can move products. But from a macroeconomic perspective, some experts believe these pitfalls indicate that the economy in the first quarter was not as weak as the drop in GDP might show.

Anna Rathbone, chief investment officer at CBIZ Investment Consulting Services, noted that the 1.6% contraction in first-quarter GDP was artificially low because companies began hoarding inventory in the last quarter of last year. This boosted economic activity that would otherwise have occurred in the first few months of this year, he said.

“The last quarter, to me, was a bit bloated,” Rathbone said. “Everyone was hoarding things.”

The trade deficit, something to watch closely in the US economy

Also, if companies import more and export less, this dynamic affects GDP, said Jacob Kierkegaard, senior fellow at the Peterson Institute for International Economics.

“It is the value of production within the physical borders of the United States. So if, hypothetically, you have constant exports and imports are higher, your trade deficit is increasing. In this sense, the growing trade deficit is subtracted from GDP,” he explained, “especially when combined with sharp fluctuations in the prices.

“When commodity prices fluctuate significantly, especially in periods of high inflation in general, that can be misleading. And in my opinion, it paints a very negative view of where the economy is,” Kierkegaard said. “We have to be careful about saying that the GDP number is exactly the right measure of the country’s economic well-being.”

Federal Reserve Chairman Jerome Powell on Wednesday emphasized the importance of considering several key economic measures as the central bank determines future interest rate movements. However, Powell said the first reading of the GDP report should be scrutinized.

CNN Business’s Alicia Wallace contributed to this report.

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