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US economy contracts slightly in second quarter; no signs of recession in underlying data

  • Second quarter GDP decline revised to 0.6% from 0.9%
  • Gross national income rises by 1.4% in the 2nd quarter
  • Average GDP and GDI are rising at a 0.4% pace
  • Weekly jobless claims fall 2,000 to 243,000

WASHINGTON, Aug 25 (Reuters) – The U.S. economy retreated at a more moderate pace than first thought in the second quarter, as consumer spending dampened some of the drag from a sharp decline in inventory accumulation, dispelling fears that a recession was underway .

That was underlined by details in the report from the Ministry of Commerce on Thursday, which shows that the economy grew steadily last quarter measured from the income side. The underlying economic strength joins recent positive readings on the labor market, retail sales and industrial production.

“We’ve had a tremendous recovery, this is a mid-cycle downturn and not a recession,” said Brian Bethune, an economics professor at Boston College. “Employment is still growing, which basically means manufacturing is still growing, but there are these supply chain issues.”

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Gross domestic product shrank at a 0.6% annual rate last quarter, the government said in its second estimate of GDP. It was an upward revision from the previously estimated decline of 0.9%. The economy fell by 1.6 per cent in the first quarter. Economists polled by Reuters had expected GDP to be revised up slightly to show output falling by 0.8 percent.

The two straight quarterly declines in GDP meet the standard definition of a technical recession. But when it comes to the US economy, the decline in GDP is misleading, given the large role that inventories play.

Supply chain disruptions have left unfinished products on factory floors or at shipping ports. These products cannot be included in GDP until they go into inventory.

Inventories rose by $83.9 billion last quarter after increasing by $188.5 billion in the first quarter. They subtracted 1.83 percentage points from GDP. Consumer spending grew by 1.5%, up from the previously reported 1.0%. Shortages and the resulting higher prices have reduced consumption.

An alternative measure of growth, gross domestic income, or GDI, increased by 1.4% in the second quarter. The GDI, which measures the economy’s performance from the income side, grew by 1.8% in the first quarter. It is calculated using the company’s profit, compensation and the owners’ income data.

While GDI and GDP can diverge from one quarter to another, there has been no convergence since the end of 2020, leaving a large gap of 3.9 percentage points. In the long run, GDP tends to converge towards GDI, although it is not a golden rule.

“Hopefully at some point we’ll have less disruption in the supply chain and production will catch up,” Bethune said. “Production will be higher than income, but we are a long way from that.

The average of GDP and GDI, also referred to as gross domestic product and considered a better measure of economic activity, increased by 0.4% in the April-June period, up from 0.1% growth in the first quarter.

Stocks on Wall Street traded higher. The dollar fell against a basket of currencies. Prices of US government bonds rose.


The income side of the growth book was strengthened by strong profits and wage growth in a tight labor market.

National profit after taxes excluding inventory values ​​and capital spending adjustments, conceptually most similar to S&P 500 profit, rose $284.9 billion, or 10.4%, accelerating from 1.0% growth in the January-March period. They were boosted by gains in the energy sector as oil prices rose due to the war between Russia and Ukraine.

The profit was 11.9% higher than the previous year.

The National Bureau of Economic Research, the official judge of recessions in the United States, defines a recession as “a significant decline in economic activity spread throughout the economy, lasting more than a few months, normally visible in output, employment, real income, and other indicators .”

The underlying economic strength is a double-edged sword. Even if it doesn’t show a recession, it gives the Federal Reserve ammunition to maintain its aggressive monetary tightening campaign, raising the risk of a downturn.

The US central bank has raised the key interest rate by 225 basis points since March. Fed Chairman Jerome Powell’s speech on Friday at the annual Jackson Hole global central bank conference in Wyoming may shed more light on whether the Fed can engineer an economic slowdown without triggering a recession.

The labor market is a key part of that puzzle. Although interest-sensitive industries such as housing and technology are laying off workers, broad-based job cuts have yet to materialize, making the overall labor market tight.

A separate report from the Ministry of Labor on Thursday showed that initial claims for state unemployment benefits fell by 2,000 to a seasonally adjusted 243,000 for the week ending 20 August. Claims have bounced around the 250,000 level since hitting an eight-month high of 261,000 in mid-July.

The number of people receiving benefits after a first week of assistance fell 19,000 to 1.415 million in the week ending August 13. The so-called continuing claims, a proxy for employment, covered the week when the government surveyed households for August’s unemployment rate.

Reuters graphics

The unemployment rate fell to a pre-pandemic low of 3.5% in July from 3.6% in June. There were 10.7 million job vacancies at the end of June, with 1.8 jobs for every unemployed worker.

“The jobs engine will continue to churn, although higher costs, more volatile demand and lower profitability will weigh on labor market conditions,” said Oren Klachkin, chief U.S. economist at Oxford Economics in New York.

“However, a persistent low labor supply will prevent an increase in the number of vacant claims, as employers will be concerned about how long it may take to fill vacancies.”

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Reporting by Lucia Mutikani; Editing by Paul Simao and Chizu Nomiyama

Our standards: Thomson Reuters Trust Principles.

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