Did the U.S. economy really sink into recession in the first half of 2022? And did it just re-emerge from recession and begin to expand again by late summer?
The answers are no and no. But in the sometimes wacky ways of GDP, it’s not easy to tell how the economy is doing.
Gross domestic product, the official scorecard of sorts for the economy, is a report whose headline number is often more or less than its parts.
Take the third quarter this year. GDP rose at a 2.6% annual clip — well above the roughly 2% level seen as the economy’s optimal long-run growth rate.
Good news to be sure, especially after the economy contracted in the first six months of 2022. GDP shrank at a 0.6% pace in the second quarter and 1.6% in the first quarter, meeting an old but informal definition of a recession.
Yet the devil, as the saying goes, is in the details. And the details of the third-quarter report weren’t all that great.
For one thing, the entire increase in GDP stemmed from a shrinking U.S. international trade deficit.
“The 2.6% annualized rebound in third-quarter GDP looks impressive, but it was entirely due to a 2.8% boost from net external trade,” noted Paul Ashworth, chief North American economist at Capital Economics.
Higher government spending — spurred in part by more aid for war-torn Ukraine — also puffed up the third-quarter report.
The two main legs of the economy, consumer spending and business investment, were not nearly as robust.
The increase in consumer spending slowed to a modest 1.4% from 2% in the prior quarter. Not bad, but it was well below the 2.3% average in the decade before the pandemic.
Business investment was far worse.
Spending on structures such as oil rigs and office buildings sank at a 15.3% rate. And outlays on new housing tanked by 26% as soaring mortgage rates strangled the construction business.
The slowdown in consumer and business spending point to tougher times ahead, particularly with the Federal Reserve rapidly raising interest rates. Higher borrowing costs are expected to slow the economy and perhaps even trigger a recession by 2023.
What about the contraction in GDP in the first two quarters of 2023? The headline numbers were also misleading. In both of those cases, GDP made the economy look worse than it really was.
In the first quarter, for instance, a record trade deficit shaved off 3 percentage points of growth from GDP. Otherwise the economy would have officially shown growth.
In the second quarter, meanwhile, slower inventory growth was the main source of the small decline in GDP. Consumer spending was actually fairly robust in the spring, rising a solid 2% after adjusting for inflation.
What’s more, the economy added hundreds of thousands of new jobs in the first six months of the year. The hiring surge drove the U.S. unemployment rate down to 3.5% to match a nearly 55-year low.
Simply put, the economy never adds jobs in a true recession.
In any case, GDP is always a look in the rear-view mirror. Looking at the road ahead, the economy faces a bumpier ride.
“Positive growth following two negative quarters is a good thing, no question, but it is not likely to last,” said chief economist Chris Low of FHN Financial.
