The recent GDP report has revealed that the US economy is slipping into a recession as inflation weighs on growth, but according to Morgan Stanley, this year’s third quarter will see better growth.
A recession is typically defined as two consecutive quarters of negative growth, which the second quarter of the U.S. economy signified.
Following a decline of 1.6 percent in the first quarter, the gross domestic product (GDP) decreased by 0.9 percent on an annualized basis, the Commerce Department reported on Thursday. The market had estimated a gain of 0.5 percent for the period from April to June.
The reduction in GDP was due to decreases in government spending (-0.33 percent), residential investment (-0.71%), and inventories (-2.01%). However, this was partially offset by increases in exports (+1.43%) and consumer spending (+0.7%).
“The U.S. economy is slowing at a significant rate,” economist Mohamed El-Erian tweeted shortly after the numbers were published. “Add to that the 8.7% price change in today’s data and the bottom line is clear: Deepening stagflation and flashing red recession risk.”
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The eagerly awaited GDP report also revealed a 0.5% decline in real personal income. Additionally, the proportion of personal savings to disposable personal income fell from 5.6 percent in the first quarter to 5.2 percent in the second.
Additionally, the reduction in retail trade, particularly in general merchandise stores and auto dealers, was the main cause of the decline in inventory. The decline in non-defense spending, mostly brought on by the sale of crude oil from the Strategic Petroleum Reserve (SPR), was blamed for the drop in government spending.
According to the report’s details, residential investment decreased by 14% on an annualized basis. A decline in “other” structures, particularly brokers’ commissions, was the main cause of this. Broker commissions decreased, which was reflected in the drop in real estate investment.
In a report, experts from Morgan Stanley dubbed the current state of the economy as a “technical recession.”
“Real GDP contracted in the second quarter, marking a technical recession,” the economists wrote. “We have highlighted the risks that 2Q data would mark a technical recession, not an economic one, as private final domestic demand remained positive in the first half of the year.”
According to Morgan Stanley, this year’s third quarter will see better growth.
The increase in consumer expenditure on services was the positive aspect of the GDP report. However, there was a noticeable decrease in spending on both durable and nondurable goods. According to Morgan Stanley, the reason for this was a historic fall in grocery spending as a result of consumers choosing to buy less expensive goods in response to rising food prices.
By year’s end, Desmond Lachman, senior scholar and economist at the American Enterprise Institute, predicts a “hard economic landing.”
“Consumer sentiment is at close to a record low as inflation erodes wages. The housing market is crumbling as a result of a doubling in mortgage rates. And our exporters are facing strong headwinds as a result of a strong dollar and economic troubles in Europe, China, and the emerging market economies,” he wrote in a note.
Due to the GDP news, stocks fell at the start of trading on Thursday, although it eventually rose. The S&P 500 increased by almost 1% and the Dow Jones Industrial Average increased by more than 300 points. The Nasdaq Composite Index increased by 0.7%.
Politicians and analysts have been debating whether or not the United States is in a recession since the release of the GDP data.
“It is widely believed that two consecutive quarters of declining real GDP is an outright recession,” economist Ed Yardeni wrote in a note. “However, it won’t be an official recession until the Dating Committee of the National Bureau of Economic Research says so, which could be awhile. … While we are waiting for them to decide whether we are in a recession or not, let’s just call it a ‘banana.’”
Definition of Recession
To evaluate whether an economy has entered a recession, the majority of economists typically look for two consecutive quarters of GDP drop. In a recent blog post, the White House Council of Economic Advisers refuted this idea while quoting the official definition.
A group of economists at the National Bureau of Economic Research (NBER) officially declares recessions in the US. “A significant decline in economic activity that is spread across the economy and that lasts more than a few months” is how the NBER defines a recession.
The White House asserts that rather than relying solely on statistics from two quarters of economic growth, recessions should be assessed and “based on a holistic look at the data,” taking into account the labor market, consumer and corporate spending, industrial production, and earnings.
The White House has come under fire in recent days for challenging the conventional definition of a recession and downplaying the chances of one.
“Two negative quarters of GDP growth is not the technical definition of recession,” National Economic Council (NEC) adviser Brian Deese told reporters during a briefing on Tuesday. “The most important question economically is whether working people and middle-class families have more breathing room.”
However, Deese pointed out in 2008 that “economists have a technical definition of recession, which is two consecutive quarters of negative growth.”
In an appearance with NBC’s “Meet the Press,” Treasury Secretary Janet Yellen allayed fears of a recession by referencing “a very strong labor market.”
“This is not an economy that’s in recession,” she said.
Federal Reserve Chair Jerome Powell also claimed, citing the employment situation, that the United States was not in the midst of an economic downturn in a press conference following the Federal Open Market Committee (FOMC), on Wednesday.
“I do not think the U.S. is currently in a recession, and the reason is there are too many areas of the economy that are performing too well,” Powell said.
‘Unusual Business Cycle’
A recession has become a more common base case for economists and Wall Street firms in recent weeks, with a wide range of data supporting this prediction. However, the timing has changed, ranging from the year’s end to some point in the next 24 months.
“None of this is to say that recession risks are nothing to worry about. Rather, we expect that recession risk will crest in 2023, as that’s when the economy will feel the brunt of Fed tightening. In particular, rising interest rates are starting to trigger a downturn in the housing markets. We expect housing starts to decline 10% in 2023, which will weigh heavily on broader economic activity,” wrote Preston Caldwell, the head of U.S. Economics for Morningstar, in a note.
Americans are aware when their standard of life is falling, according to a note published on Wednesday by Sit Investment Associates senior portfolio manager Bryce Doty.
“Economists have a delusional concept of recession,” he said. “Since April of last year, real wages have turned negative. Workers are going backwards as higher costs outpace wages increases resulting in a net reduction in what people are able to afford.”
A portfolio manager at Merk Investments named Nick Reece describes the current situation as “an unusual business cycle, following an unusual recession.”
The Atlanta Fed Bank will release its first GDPNow estimate for the third quarter on Friday.