The Bureau of Economic Analysis declined for the second straight quarter in Q2 bringing the economy closer to an official recession. According to the advance estimates, GDP declined by 0.9% in Q2 following a 1.6% drop in Q1. This was worse than analysts' estimates of a 0.3% gain.
Of course, there is now a raging debate about the technical definition of a recession. Officially, the National Bureau of Economic Research is the official arbiter of whether a recession has begun. And, it's often only clear in hindsight. However, others believe that a recession is any sequential decline in output which means that the economy is in a recession.
Not surprisingly, financial markets didn't really have a strong reaction to the recession news as it has already been priced in based on estimates and investor positioning. Stocks continued their bear market rally as investors see inflation peaking and the Federal Reserve possibly pivoting. Bond yields also declined with inflation expectations decreasing.
The weakness in GDP figures was broad-based with a decline in inventories, housing, construction, and government spending at the federal, state, and local levels. In total, gross private domestic investment declined by 13.5%.
Consumer spending was up only 1% with declines in durable goods and nondurable goods of 3% and 6%, respectively. One area of growth was spending on services which saw a 4.1% increase.
Inventories, which were a positive tailwind during the post-pandemic economy became a tailwind as it led to a 2% drop in GDP. Inflation also had an impact on slowing growth in real incomes and pushed the savings rate lower.
Inflation was at the root of much of the economy's troubles. The consumer price index rose 8.6% in the quarter, the fastest pace since Q4 of 1981. That resulted in a decline of inflation-adjusted after-tax personal income of 0.5%, while the personal saving rate was 5.2%, down from 5.6% in the first quarter.
Of course, the slowdown is an intended result of the Fed's tightening cycle which has taken rates from 0 at the start of the year to 2.25% with hikes expected to continue albeit at a slower pace.
It also reduces the chances that the Fed will be successful in attaining a 'soft landing'. Although, earnings season has gone much better than expected.