This article is provided by ITR Economics in partnership with IMEC.
US Real Gross Domestic Product (Real GDP) in the second quarter of 2022 came in 0.23% below the first quarter, marking two consecutive quarters of contraction and fulfilling the technical definition of a recession. While the word “recession” tends to elicit fear, we do not believe the current economic situation warrants significant concern. The decline was led by imports outpacing exports, changes in private inventory investment (not a reduction, but rather a smaller increase), lower fixed investment in residential and nonresidential structures, and a decrease in government expenditures and investments. However, core segments such as consumer spending, the labor market, and the industrial sector are on solid footing − more on this below.
While inflation may be somewhat eating into purchasing power, overall consumer spending is up even on an inflation-adjusted basis. The US Personal Consumption Expenditures component of Real GDP rose, albeit mildly, from the first to second quarter. Much of this rise is due to increased spending activity on services, including utilities and medical care, as opposed to spending on goods. Many consumers pulled back on discretionary goods purchases given the current inflationary environment.
The labor market remains tight, which is atypical during a recession. Monthly US Private Sector Employment in both June and July was at record highs. US Total Nonfarm Job Openings have ticked down but remain elevated at 10.6 million; there are currently about 1.7 open jobs for every unemployed person. We expect further growth in the labor market, which bodes well for the consumer. Additionally, US Average Annual Wages are rising, and continued tightness in the labor market will contribute to further wage increase, another positive sign for consumer spending.
Annual US Industrial Production has risen to just 1% below the 2019 record level. Throughout the pandemic, backlogs grew amid supply chain challenges and robust demand. As supply chain pressures begin to ease, those backlogs will keep many companies busy and contribute to further rise in Industrial Production.
At the same time, US Nondefense Capital Goods New Orders (excluding aircraft), a proxy for business-to-business spending, have risen to further record highs. Inflation-adjusted annual New Orders have flattened out.
Don’t panic. Consumers are still spending, the labor market is tight and growing, and the industrial sector is rising. Our analysis of economic fundamentals suggests businesses should be poised for a relatively mild cyclical downturn into late next year. Some markets will slow in growth, and others will mildly contract. Industries that experienced an outsized benefit from the pandemic are more likely to see a sharper correction.
We are less worried for the state of the economy in the next two years than for the longer-term economic trends that are likely to come home to roost around the middle of this decade and even more so in the 2030s (see our Great Depression resources for more on this). Remember that even periods of contraction can provide opportunities, if you are prepared.