WASHINGTON–New data showing the U.S. gross domestic product (GDP) declined for the second straight quarter does not necessarily mean the country is in a recession, but it does raise questions over whether the slowdown will be enough to bring down inflation, according to two credit union economists.
The new federal data show GDP, adjusted for inflation, declined 0.2% in the second quarter, the equivalent of an 0.9% annual rate of decline, according to the Commerce Department.
The Q2 decline followed a contraction of 0.4% in Q1. Recessions are often defined as two consecutive quarters of negative growth. The new GDP numbers follow by one day an announcement by the Fed that it is raising its benchmark rates 75 basis points as it seeks to tamp down inflation.
Not a Signal of a Recession
“Real gross domestic product decreased by 0.9% for a second consecutive quarter due to significant decline in private inventories and investment in new housing,” said CUNA Senior Economist Dr. Dawit Kebede. “Personal consumption, which accounts for two-thirds of the economy, continued to increase but it slowed down relative to the first quarter. Spending on services offset the decline in goods spending. The trade deficit, which was a major reason behind the first quarter decline, improved on account of strong export activity.
“We are not in a recession just because we have two quarters of decline,” Kebede continued. “Consumer spending and a strong labor market continue to be the firewall against a significant and widespread decline in economic activity. However, Federal Reserve's resolve to fight inflation by slowing consumer demand will thin out this defense.”
Mixed Signals & Challenge
“The economy is clearly slowing, but the question is, will it be enough to bring down inflation, but not so quickly that it leads to a major recession?” asked NAFCU Chief Economist and VP of Research Curt Long. “On the first count, today’s figures are concerning. Nominal consumer spending increased at a nearly 8% clip in the second quarter, down slightly from prior quarters but still leaves the Fed with much to do to address sky-high inflation.”