US Economy Shrinks for Second Straight Quarter as It Enters Technical Recession

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The real gross domestic product (GDP) decreased 0.9% in the second quarter, according to the Bureau of Economic Analysis (BEA), following the first quarter decrease of 1.6%. This turn of events would technically mean that the economy is in a recession. However, whether we have entered a recession already or not depends on who you ask.

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According to the National Bureau of Economic Research (NBER), whose economists declare whether the country is in a recession or not, such a phenomenon occurs when there is “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” It added, however, that “because a recession must influence the economy broadly and not be confined to one sector, the committee emphasizes economy-wide measures of economic activity.”

CNBC reported that every period since 1948 of two consecutive negative quarters has coincided with a recession, but the NBER isn’t likely to pronounce itself anytime soon on the issue.

Jeffrey Rosenkranz, portfolio manager at Shelton Capital Management, told GOBankingRates that as the U.S. economy shrank 0.9% in the second quarter, after a 1.6% drop in the first quarter, anywhere other than the U.S. would have qualified this as a recession.

He noted, however, that the official determination of a recession in the U.S. — made by the academics at the NBER — is designed to incorporate a more broad-based slowing of the economy.

“Whether or not a few months from now they retroactively determine that the recession has begun, everyone in the real world already knows the truth,” he said.  “What began as a slowing of some of the typical leading indicators has spread to broader commodity price declines, signs of demand destruction all around and an uptick in jobless claims.”

Rosenkranz then said that a sampling of second quarter corporate earnings call commentaries would clearly confirm that the economy is contracting.

“While the White House and the Fed might want to convince us otherwise, the bottom line is that the bond market is sending clear signals that inflation is starting to come under control, and eventually over the coming months the Fed’s job will be done, until their next task of cutting rates is upon them,” he concluded.

President Joe Biden said in a statement that “coming off of last year’s historic economic growth — and regaining all the private sector jobs lost during the pandemic crisis — it’s no surprise that the economy is slowing down as the Federal Reserve acts to bring down inflation. But even as we face historic global challenges, we are on the right path and we will come through this transition stronger and more secure. Our job market remains historically strong, with unemployment at 3.6% and more than 1 million jobs created in the second quarter alone.”

His comments echoed those of Secretary Janet Yellen, who said on July 24 on Meet the Press that while “the economy is slowing down,” “this is not an economy that’s in recession,” adding, however, that “inflation is way too high.”

Yellen explained that the technical and actual definition of a recession considers “a broad range of data,” saying “this is not an economy that’s in recession,” as GOBankigRates previously reported.

“But you don’t see any of the signs now — a recession is a broad-based contraction that affects many sectors of the economy — we just don’t have that. Consumer spending remains solid. It’s continuing to grow. Output, industrial output has grown in five of the six most recent months. Credit quality remains very strong. Household balance sheets are generally in good shape,” she added.

David Russell, VP, Market Intelligence at TradeStation Group said he views the economy as “a giant herd of stampeding cattle.” They normally run in unison, but Covid was an unprecedented disruption. The supply animals fell way behind the demand animals as we reopened, causing widespread shortages and inflation.”

He added that a mini slowdown could be just what we need for everyone to get caught up and moving in tandem again. “Jerome Powell is probably smiling at the GDP number today, he said. “People might be able to call it a technical recession, but there are still millions of unfilled jobs and few signs of distress in the credit markets. An alleged recession in mid-2022 may end up being considered nothing a year or two from now.”

The BEA data showed that the decrease in real GDP reflected decreases in private inventory investment, residential fixed investment, federal government spending, state and local government spending and nonresidential fixed investment that were partly offset by increases in exports and personal consumption expenditures (PCE).

Louis Ricci, Head Trader at Emles Advisors told GOBankingRates that “as usual, there is something for everyone in this point. Consensus was +.4% but whisper/sentiment was aware it could likely be negative. The definition of a technical recession or not is less important than the strength of the underlying economy with respect to employment and spending.”

Ricci added that continuing jobless claims and unemployment rate remain reassuring, and consumer spending kept growing, although decelerated.

“Pundits are pointing to inventory glut (less need for inventory restock) and increased imports due to strong USD as two factors which weighed on GDP but are not indications of weakness in the economy,” he said. “Inventory glut contributes to bringing inflation down as it leads to promotions/discounts, but can be a double-edged sword as it weighs on margins and profitability.”

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According to Ricc, “the bear case is that we now have two consecutive negative GDP quarters with inflation not gone despite moderating. The bull case, if you believe the markets today, is that they may have sniffed this out in advance. This is a step toward the Fed being able to declare ‘mission accomplished.’”

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