- GDP contraction in second quarter revised from 0.9% to 0.6%
- Gross domestic income up 1.4% in Q2
- Average GDP and FDI rising at a pace of 0.4%
- Weekly unemployment claims fall by 2,000 to 243,000
WASHINGTON, Aug. 25 (Reuters) – The U.S. economy contracted at a more moderate pace than initially thought in the second quarter as consumer spending eased some of the drag on a sharp slowdown in inventory accumulation, raising fears of a recession was going on was taken away.
That was underlined by details of Thursday’s Commerce Department report, which shows that the economy grew steadily over the past quarter as measured from the revenue side. Underlying economic strength is in line with recent positive reports from the labor market, retail trade and industrial production.
“We’ve had a massive recovery. This is a mid-cycle slowdown and not a recession,” said Brian Bethune, an economics professor at Boston College. “Employment is still growing, which basically means production is still growing, but there are these supply chain issues.”
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Gross domestic product shrank by 0.6% year-on-year in the past quarter, the government said in its second GDP estimate. That was an upward revision from the previously estimated 0.9% rate of decline. The economy shrank by 1.6% in the first quarter. Economists polled by Reuters had expected GDP to be revised slightly upwards to show output falling 0.8%.
The two consecutive quarterly declines in GDP meet the standard definition of a technical recession. But in the case of the US economy, GDP contraction is misleading given the large role played by inventories.
Supply chain disruptions have left unfinished products on factory floors or in shipping docks. These products can only be included in GDP if they are included in inventories.
Inventories rose $83.9 billion in the quarter after rising at a pace of $188.5 billion in the first quarter. They subtracted 1.83 percentage point from GDP. Consumer spending grew at a rate of 1.5%, revised from the previously reported rate of 1.0%. Shortages and the resulting higher prices have depressed spending.
An alternative measure of growth, gross domestic income or FDI, rose 1.4% in the second quarter. The GDI, which measures the economy’s performance on the revenue side, grew at a rate of 1.8% in the first quarter. It is calculated using company profits, fees and income data from the owners.
While FDI and GDP may differ from one quarter to another, there has been no convergence since late 2020, leaving a huge gap of 3.9 percentage points. In the long run, GDP tends to converge towards the GDI, although that is not a golden rule.
“Hopefully at some point we will have fewer disruptions in the supply chain and production will catch up,” says Bethune. “Production will be higher than income, but we are still a long way from that.”
The average of GDP and FDI, also known as gross domestic production and considered a better measure of economic activity, increased by 0.4% in the period April-June, against a growth rate of 0.1% in the first quarter.
Shares on Wall Street were trading higher. The dollar fell against a basket of currencies. US Treasury bond prices rose.
RESILIENT LABOR MARKET
The income side of the growth book was boosted by strong profits and wage increases in a tight labor market.
National after-tax profits excluding inventory valuation and capital consumption adjustments, which are conceptually most similar to the earnings of the S&P 500, grew by $284.9 billion, or at a rate of 10.4%, accelerating ahead of the growth rate of 1.0% in the period January-March. They were boosted by gains in the energy sector as oil prices rose as a result of the war between Russia and Ukraine.
Earnings were 11.9% higher than a year ago.
The National Bureau of Economic Research, the official arbiter of recessions in the United States, defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally apparent in manufacturing, employment, real income, and other indicators.”
The underlying economic strength is a double-edged sword. While not showing a recession, it gives the Federal Reserve ammunition to continue its aggressive monetary tightening campaign, increasing the risk of a downturn.
The US central bank has raised its key rate by 225 basis points since March. Fed Chair Jerome Powell’s speech on Friday at the annual Jackson Hole global central banking conference in Wyoming could shed more light on whether the Fed can bring about an economic slowdown without triggering a recession.
The labor market is an important piece of that puzzle. While interest-rate-sensitive sectors such as housing and technology are laying off workers, broad job cuts are not yet due, leaving the overall labor market tight.
A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits fell by 2,000 to a seasonally adjusted 243,000 for the week ending August 20. The claims are up around the 250,000 level since the eight-month high of 261,000 in mid-July.
The number of people receiving benefits after a first week of aid fell by 19,000 to 1,415 million in the week ending August 13. The so-called persistent claims, indicative of hiring, related to the week when the government surveyed households about the unemployment rate in August.
The unemployment rate fell from 3.6% in June to a pre-pandemic low of 3.5% in July. At the end of June, there were 10.7 million vacancies, with 1.8 vacancies for every unemployed person.
“The job machine will continue to churn, although higher costs, shaky demand and lower profitability will weigh on labor market conditions,” said Oren Klachkin, chief US economist at Oxford Economics in New York.
“However, continued labor shortages will prevent a spike in unemployment applications as employers worry about how long it may take to fill open positions.”
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Reporting by Lucia Mutikani; Editing by Paul Simao and Chizu Nomiyama
Our Standards: The Thomson Reuters Trust Principles.