The US economy contracts slightly in the second quarter; no sign of recession in underlying data

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  • Second quarter GDP contraction revised to 0.6% from 0.9%
  • Gross domestic income increases by 1.4% in Q2
  • The average of GDP and GNI climbs at a rate of 0.4%
  • Weekly jobless claims fall by 2,000 to 243,000

WASHINGTON, Aug 25 (Reuters) – The U.S. economy contracted at a more subdued pace than initially thought in the second quarter as consumer spending cushioned some of the slowdown from a sharp slowdown in the inventory accumulation, allaying fears of an ongoing recession.

This was underscored by details from the Commerce Department’s report on Thursday, showing the economy grew steadily last quarter, measured on the revenue side. The underlying economic strength is consistent with recent upbeat readings in the labor market, retail sales and industrial production.

“We’ve had a tremendous recovery, this is a mid-cycle slowdown, not a recession,” said Brian Bethune, professor of economics at Boston College. “Employment continues to grow, which basically means production continues to grow, but there are these supply chain issues.”

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Gross domestic product shrank at an annualized rate of 0.6% last quarter, the government said in its second GDP estimate. This was an upward revision from the previously estimated 0.9% pace of decline. The economy contracted at a rate of 1.6% in the first quarter. Economists polled by Reuters had expected GDP to be revised slightly higher to show output falling at a rate of 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, the contraction in GDP is misleading, given the large role played by inventories.

Supply chain disruptions have left unfinished products in factories or on shipping docks. These products cannot be included in GDP until they enter inventory.

Inventories rose at a rate of $83.9 billion last quarter after rising at a pace of $188.5 billion in the first quarter. They subtracted 1.83 percentage points from GDP. Consumer spending rose at a pace of 1.5%, revised up from the 1.0% rate previously recorded. The resulting shortages and higher prices weighed on spending.

Another measure of growth, gross domestic income, or GDI, rose at a rate of 1.4% in the second quarter. The GDI, which measures the performance of the economy on the income side, grew at a pace of 1.8% in the first quarter. It is calculated from company profits, compensation and owner income data.

While GDI and GDP can diverge from quarter to quarter, there has been no convergence since the end of 2020, leaving a huge gap of 3.9 percentage points. In the long term, the GDP tends to converge towards the GDI, although this is not a rule of thumb.

“Hopefully at some point we’ll have less supply chain disruption and production will catch up,” Bethune said. “Production will be higher than income, but we are far from it.”

Average GDP and GDI, also known as gross domestic production and considered a better measure of economic activity, grew at a rate of 0.4% during the April-June period, compared to a growth pace of 0.1% in the first quarter.

Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. US Treasury prices rose.

RESILIENT LABOR MARKET

The income side of the growth ledger was boosted by strong earnings as well as wage gains in a tight labor market.

National after-tax earnings without inventory valuation and capital consumption adjustments, conceptually most similar to S&P 500 earnings, rose $284.9 billion, or a 10.4% pace, accelerating from compared to the 1.0% growth rate of the January-March period. They were boosted by gains in the energy sector as oil prices soared due to the Russian-Ukrainian war.

Profits were up 11.9% from 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 distributed throughout the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators.”

The underlying economic strength is a double-edged sword. Although it shows no recession, it gives the Federal Reserve ammunition to maintain its aggressive monetary policy tightening campaign, increasing the risk of a downturn.

The US central bank has raised its key rate by 225 basis points since March. Fed Chairman Jerome Powell’s speech Friday at the annual conference of world central banks in Jackson Hole, Wyoming, may shed more light on the Fed’s ability to cause an economic slowdown without triggering a recession.

The labor market is a key piece of this puzzle. Although interest-rate-sensitive industries like housing and technology are laying off workers, large-scale job cuts have yet to materialize, leaving the overall labor market tight.

A separate Labor Department report on Thursday showed initial claims for state unemployment benefits fell 2,000 to a seasonally adjusted 243,000 for the week ended Aug. 20. Requests have bounced around the 250,000 level since hitting an eight-month high of 261,000 in July.

The number of people receiving benefits after a first week of help fell by 19,000 to 1.415 million in the week ending August 13. .

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The unemployment rate fell to a pre-pandemic low of 3.5% in July, from 3.6% in June. There were 10.7 million job openings at the end of June, with 1.8 openings for every unemployed person.

“The jobs machine will keep turning, although higher costs, more fragile demand and weaker profitability will weigh on labor market conditions,” said Oren Klachkin, chief US economist at Oxford Economics in New York. .

“However, the persistent labor supply will prevent an increase in unemployment insurance claims, as employers will be concerned about the time it will take to fill vacancies.”

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Reporting by Lucia Mutikani; Editing by Paul Simao and Chizu Nomiyama

Our standards: The Thomson Reuters Trust Principles.


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