After shrinking from January to March, the US economy probably didn’t do much better in the spring.
On Thursday morning, the government will reveal just how weak economic growth has been in the April-June quarter – and possibly offer clues to whether the United States is heading into a recession.
The report comes at a critical time: On Wednesday, the Federal Reserve raised its benchmark interest rate by three-quarters of a point for the second straight time in its bid to beat the worst inflation spike in four decades. The Fed is aiming for a notoriously difficult “soft landing”: an economic slowdown that manages to rein in soaring prices without triggering a recession.
Forecasters polled by data firm FactSet estimated that the country’s gross domestic product – the broadest measure of economic output – recorded a tepid 0.8% annual gain last quarter. Modest as it is, this would represent a marked improvement from the economy’s 1.6% contraction in the January-March quarter.
Still, such slow quarterly growth would represent a drastic weakening from the 5.7% growth the economy achieved last year. This is the fastest calendar-year expansion since 1984, reflecting the strength with which the economy rebounded from the brief but brutal pandemic recession of 2020.
Some economists worry that GDP actually shrank further from April to June, delivering the back-to-back negative quarters that constitute an informal definition of a recession. The current estimate of GDP growth from the Federal Reserve Bank of Atlanta, based on available economic data, points to a decline of 1.2% in the second quarter.
Most economists, however, point in particular to a still-robust labor market, with 11 million job openings and an unusually low unemployment rate of 3.6%, to suggest that a recession, if one occurs , is still a long way off.
For one thing, the economic contraction in the first quarter was not as alarming as it looked. It was caused mainly by factors that do not reflect the underlying health of the economy: a larger trade deficit, a consequence of Americans’ strong appetite for foreign-made goods, reduced by 3.2 points percentage growth in the first quarter. And a drop in business inventories after the holiday season shrank another 0.4 percentage points.
The strength of the U.S. labor market, Fed Chairman Jerome Powell said at a news conference on Wednesday, “makes you question the GDP data.”
The economy released encouraging news on Wednesday: June reports on the trade deficit (narrower), inventories (higher) and high-priced industrial goods orders (better than expected) suggested that GDP in the second quarter could turn out to be stronger than previously feared. JP Morgan economists doubled their April-June growth forecast to an annual rate of 1.4%.
Even so, recession risks are growing as Fed policymakers pursue an aggressive policy of rate hikes which, while they may ease in the coming months, will likely continue well into 2023. the Fed have already led to a doubling of the average rate on a 30-year fixed mortgage over the past year, to 5.5%. Home sales, which are particularly sensitive to changes in interest rates, fell.
Some economists echoed an observation made by Powell during his press conference on Wednesday: that the economy, taken as a whole, does not appear to be in the grip of a recession.
“We do not believe the economy is currently in a recession,” Tim Quinlan and Shannon Seery, economists at Wells Fargo, wrote this week.
Quinlan and Seery estimated that GDP grew at a glacial 0.2% annual rate in the April-June quarter – “a harbinger of the worst to come as we expect the economy to enter a slight recession at the beginning of next year”.
Even if the economy records a second consecutive quarter of negative GDP, most economists would not consider it a signal of a recession. The most widely accepted definition of recession is that determined by the National Bureau of Economic Research, a group of economists whose Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that spreads through the whole economy and lasts more than a few months.
The committee weighs a range of factors before publicly declaring an economic boom dead and a recession in the making – and often does so long after the fact.