Real GDP registered a negative number for a second consecutive quarter—a common “rule of thumb” indicator of recession. Many analysts have disputed the notion that the economy is currently in recession, citing areas of continuing strength such as employment and consumer spending. It would not be a profitable investment of time or ink to further dispute here whether the US is already in recession—our economy is decelerating, and that deceleration is becoming more pronounced with each successive economic release.
Real GDP contracted by 0.9% in the second quarter of 2022, according to the initial estimate, after contracting 1.6% in the first quarter. GDP and many of the other economic measures most commonly cited are backward-looking. They report on events that have already occurred. Leading economic indicators tend to get less attention, but also tend to be more indicative of where the economy is heading. Leading indicators include such measures as new building permits, new orders for manufacturing, and initial jobless claims. The Conference Board’s index of leading economic indicators declined for a fourth consecutive month in June and was down 1.8% for the first half of 2022.
Industrial production contracted in June, after posting an almost negligible gain in May. New orders and employment are contracting, even as other measures of output continue to expand. Personal income is increasing, but at a slower rate than inflation, so household purchasing power has declined. We are spending more to acquire less. Average hourly earnings increased 5.1% YOY in June. Wages have been rising at a slower pace in recent months. Personal consumption increased 1.0% in the second quarter, the smallest increase since the height of the pandemic. Spending on goods was negative, and spending on services was up 4.1%, annualized. Services comprise the greater part of the US economy, and spending on goods was pulled forward during the pandemic.
Prices are increasing at the fastest pace in decades. The Federal Reserve is sharply raising interest rates. In a perfect world, policymakers could bring prices under control by tempering demand without triggering a recession. In our world, that outcome is not impossible, but very difficult to orchestrate in a very large and complex economy where policymakers have a limited toolbox.
The primary factors that shaped the economy over the past two years are evolving, but not going away. Supply chains appear to be gradually healing, and many businesses are diversifying their sources and channels for tangible goods. Ships at anchor off the California coast have declined 80% since January, but truckers and railroads are still struggling to keep up with the increased throughput. The war in Ukraine continues to negatively impact energy costs, grain, and fertilizer markets. In back-to-back reports, we learned that Russia and Ukraine had entered into a grain export agreement and then that one of Ukraine’s key ports had been attacked. More broadly, the world economy has stepped back from decades of progress in the direction of globalization. With all its faults, globalization reduced barriers to trade, lowered the cost of tangible goods, and tamped down inflation over most of the past several decades. If there is another trade regime that will succeed it, it has yet to take shape.
Some positives could emerge from the present challenges. Persistent energy inflation has increased focus on renewables with an attendant focus on the hard economics of our choices in this area. Diversification of our supply chain is long overdue, with perhaps decreased dependence on trading partners who may not wish us every success.
Source: U.S. Bureau of Economic Analysis, fred.stlouisfed.org