The 0.9% decline in Q2 US GDP marks a second straight negative. There may be some debate on whether this yet marks a recession but the details suggest deeper underlying weakness than those of Q1. This suggests that Q3 data may well give a clearer confirmation of recession.
Q4’s 6.9% GDP increase was flattered by a surge in inventories while Q1’s 1.6% decline was depressed by weakness in net exports. Inventories slowed significantly in Q2, taking 2.0% off GDP but still have scope to slow further. Net exports saw a partial correction from Q1 weakness which will be difficult to sustain with the USD firm and many economies overseas slowing.
For a guide to underlying domestic demand we look at final sales to domestic buyers (GDP less inventories and net exports), which fell by 0.3% in Q2, the first decline since Q2 2020. Consumer spending rose by 1.0% but momentum is slowing. Real disposable income fell by 0.5%.
Housing investment fell by 14.0% and deeper weakness is likely to come as rates increase. Business investment fell by 0.1% and a near term bounce looks unlikely. Government fell by 1.9%, a third straight fall as fiscal support fades. GDP is likely to show further weakness, if not sharply, in Q3.
GDP weakness is inconsistent with labor market strength. The latter may be a lagging indicator while either GDP or employment data could be revised. GDP revisions are die with final Q2 data on September 29. Employment revisions are not due until the New Year. In early 2022 it became clear that payrolls had underestimated 2021 employment gains. They may be overestimating job gains now.
A return to GDP growth is likely to wait until Fed tightening is done and that is likely to need a significant slowing in inflation.
