This morning’s second quarter GDP report was a significant disappointment with real output falling by 0.9%, (consensus +0.5%), following a 1.6% decline in the first. While commentators often define recession as being at least two consecutive negative quarters of real GDP growth, that is not the definition used by the Business Cycle Dating Committee of the National Bureau of Economic Research who, for many decades, have been the unofficial scorekeepers of U.S. recessions. Their definition is a broader one and includes declines in employment, which clearly have not occurred so far this year. However, today’s report is further evidence that the U.S. economy is quickly losing momentum and increases the likelihood that even the broadest definition of recession will be met before the end of the year.
Weakness in this morning’s report was very widespread with declines in both residential and non-residential construction, capital spending on equipment, inventory rebuilding and government spending at both the federal and state and local levels. This was only partly offset by modest gains in consumer spending and an improvement in trade. Moreover, with massive fiscal drag, a higher dollar hurting exports and higher mortgage rates slowing the housing market, GDP growth is likely to continue to be very soft for the rest of the year.
Today’s GDP numbers will reinforce pessimism about both the state of the U.S. economy and the outlook for corporate profits. However, a small silver lining for markets is that an avowedly data-dependent Federal Reserve should see, in this weakness, a reason to be less aggressive in hiking rates in the rest of 2022.
David Kelly is chief global strategist at J.P. Morgan Asset Management.