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Q2 GDP release: US in technical recession.
Weakening demand and developments on the labor market are increasingly weighing on the outlook.
US GDP contracted again in the second quarter by 0.9% over the quarter (after a 1.6% decline in the first quarter), which is synonymous with a “technical recession”. GDP growth slowed significantly year-on-year from 3.5% to 1.6% in the second quarter, which is already below potential. The volatility was little different from what we have seen so far (this time inventories weighed heavily on GDP growth, around 2%).
The slowdown in domestic growth, on the other hand, was unusual:
• Consumption has visibly slowed, with a shift from consumption of goods to consumption of services
• Non-residential investment also showed a noticeable slowdown (due to a slight decline in equipment investment and the continued decline in investment in buildings), while investment in intellectual property continued to advance at a sustained pace
• Residential real estate investment has contracted and is likely to fall further given its interest rate sensitivity.
GDP growth was below potential in the second quarter. Importantly, for the time being, the sharp slowdown cannot be attributed solely to the Fed’s tightening of monetary policy, the effects of which are only felt with a time lag. It is primarily driven by other factors affecting US consumers (e.g. the “post-pandemic fiscal cliff”) and the impact of inflation on real incomes. We may not have seen the wealth effect yet, and while inflation may already have peaked, it will remain well above the Fed’s target for the next few quarters. Labor market data still looks robust, which bodes well for positive, albeit weak, consumption. In any case, the outlook for domestic demand, and investment in particular, will cloud over as the impact of Fed rate hikes begins to be felt.
Read the full article in the PDF below.