It’s not a recession.
It can’t be. The labor market is too strong. The midterms are too close. And the Fed still needs to squeeze in another 100bps worth of rate hikes by year-end.
You can write your own dark jokes. There are plenty. And attempts on the part of analysts, economists, administration officials and monetary policymakers to explain away a second consecutive quarterly contraction in the world’s largest economy will invariably backfire. Sundry “explanations” will only serve as more fodder for those inclined to sarcastic derision.
The US economy contracted at a 0.9% annual rate in Q2, hotly anticipated data out Thursday showed. On the conventional, if not official, definition, the US fell into a recession last quarter (figure below). The yield curve’s reputation for prescience is intact.
For the better part of a month, the Biden administration was at pains to explain to the public that a recession isn’t a recession — that the NBER, the official arbiter, is extremely unlikely to brand Q1-Q2 2022 with an “R.” Those efforts came too late.
Since Q1’s contraction, I’ve variously suggested the White House and the Fed would do well to expect the worst and hope for the best. Officials could’ve endeavored to take the edge off by socializing the message relentlessly over three months — if the American public can become desensitized to tragedy, it couldn’t possibly be too difficult to talk them to sleep with a dull, definitional debate about economics.
Of course, a sensationalized press and divisive politics meant that even if officials, both at the White House and the Fed, were successful in convincing the public that there’s no set definition of “recession,” opportunistic media outlets and politicians clamoring for “points” (figurative and literal) ahead of the midterms, meant a contractionary read on Q2 GDP would be presented as a recession regardless. So, maybe there was no point in preempting it with a PR campaign.
Notably, the personal consumption component in the advance read was a miss. The 1% gain was short of consensus (figure below) and when considered with a sharp downward revision to Q1’s print in the final estimate of first quarter growth, it’s plain that the American consumer is faltering in the face of onerous macro circumstances, including and especially elevated prices for food and gas.
Outside of the pandemic-inspired plunge in 2020, Q2 2022’s personal consumption print was the lowest since the first quarter of 2019, a period impacted by the longest government shutdown in US history.
Along with labor market strength, the notion that US consumers are “resilient” thanks to “excess” savings and accumulated pandemic “buffers” is the cornerstone of any constructive take on the outlook for the economy. I employed quite a few scare quotes in the preceding sentence — they serve a purpose.
Business spending contracted in Q2, Thursday’s advance read suggested. Nonresidential fixed investment (spending on equipment, structures and intellectual property) fell 0.1% over the quarter, following a robust increase in Q1.
It was the first decline since the pandemic months (figure above).
Residential investment crumbled amid rate hikes and a rapidly cooling property market. The 14% drop was nearly half as large as the decline accompanying Q2 2020’s depression-like economic collapse, and counted as the second largest decline in a dozen years.
Government spending fell for the third consecutive quarter. Federal, nondefense government expenditures decelerated at a double-digit rate. Notably, final sales to private domestic purchasers were unchanged in Q2. That’ll likely raise eyebrows.
Th breakdown (below) shows inventories were the biggest drag. Personal spending’s contribution was minuscule. Trade was the only real boon.
“The growing skepticism that the Fed will continue to deliver aggressive tightening has been emboldened by this morning’s numbers,” BMO’s Ian Lyngen remarked.
And yet, the Fed’s hands are tied. PCE prices rose 7.1%, the same as Q1, while core PCE, at 4.4%, remained very elevated even as it decelerated from Q1’s pace, in line with estimates. The GDP price index rose 8.7% in Q2, far more than expected and up sharply from 8.2% in the first quarter.
All in all, the numbers were poor. It was very difficult to find a silver lining or otherwise spin the report as something other than a disappointment. It suggested the economy is slowing where it counts, so to speak. Personal consumption is decelerating and investment is slowing.
Of course, that’s precisely the point if you’re the Fed. Policymakers are attempting to engineer a slowdown. The question is whether they’ll overshoot. Controlled demolitions are difficult to manage.
As Jerome Powell noted during Wednesday’s post-FOMC press conference, demand clearly slowed in Q2. He juxtaposed the situation with the more ambiguous conjuncture that prevailed in Q1, when the economy contracted on paper but many analysts waved the negative print away as meaningless. Even that position was made less tenable when the final read on first quarter growth included a large downward revision to the personal consumption component.
“You pretty clearly see a slowing in demand in the second quarter,” Powell told reporters. “We think demand is moderating. How much is it moderating? We don’t know.”
Now we do know. Or at least we have an estimate of how much “moderation” took place last quarter. That estimate is subject to revisions. A couple of them. It’s also subject to political spin, which will begin posthaste.
Don’t us the “R” word. It’s not a recession. Not yet. And not officially.