US economy shrank in first half of 2022, updated GDP confirms
The numbers: The US shrank during the first six months of the year, confirmed revised figures from the authorities, and painted a picture of the economy characterized by strong headwinds and tailwinds.
Gross domestic product, the official scorecard for the economy, fell at an annual clip of 0.6 percent in the second quarter, the Bureau of Economic Analysis said Thursday. It is unchanged from previous estimates.
Meanwhile, the previously reported 1.6% decline in first-quarter GDP was also unchanged.
The newly revised figures were unveiled as part of the government’s annual process of adjusting the previous five years of data based on new information.
Some economists had speculated that the revised figures could show growth rather than contraction. Instead, there was very little change.
Political partisans have debated whether the US had slipped into recession ahead of the central autumn election where control of Congress is at stake. An old but informal rule of thumb defines a recession as two consecutive quarters of negative GDP.
Although growth in the US has clearly slowed, the strongest labor market in decades signals that the economy is still in expansion mode. Companies are hiring, layoffs are at record lows and unemployment is close to its lowest level since the 1[ads1]960s.
In any case, the debate may already be ongoing. The US economy faces stronger headwinds this autumn, and a new recession may be on the way.
Big picture: The updated GDP figures give a slightly clearer view of what has happened to the economy since the pandemic, but it tells us nothing about the future. And the future looks weaker.
While the third quarter is likely to show that the economy is expanding again, the latest forecasts show that there is a storm as 2023 approaches.
The Federal Reserve is rapidly raising borrowing costs to curb high inflation, but its aggressive strategy is also expected to slow the economy and raise unemployment. Many economists are even predicting another recession in four years.
Key details: Consumer spending accounts for as much as 70% of US economic activity, and spending was somewhat stronger than previously reported in the first half of the year.
Spending rose at an inflation-adjusted 2% annual pace in the second quarter and 1.3% in the first quarter.
What caused GDP to shrink was a record trade deficit, the end of most pandemic stimulus and a sharp decline in business spending, particularly on new inventories.
The biggest surprise in the report was a reduction in so-called gross national income — basically wages and profits.
Income growth – the flip side of spending – was revised down in the second quarter to 0.1% from a previous 1.4%. Income growth was also reduced to 0.8% in the first quarter from 1.8%.
Many economists had suspected that GDP was actually stronger in the first half of the year than the government previously reported because of the income gain. Higher income usually means higher expenses.
However, income did not rise as much as previously estimated, probably due to rising inflation. Higher price pressures wiped out most of the revenue gains.
Looking forward: “Consumers are holding up well, even with high inflation, and the labor market remains very strong,” said PNC Financial Services Chief Economist Gus Faucher. “But there is a real possibility that the Fed could overdo it, pushing the US economy into recession in the first half of 2023.”
Market reaction: Dow Jones Industrial Average DJIA,
and the S&P 500 SPX,
was set to open lower in Thursday trading.
