7/29/2022: We are in a Recession

Q2 GDP dropped another 0.9%

Q2 2022 GDP estimate is out. The U.S. economy shrank 0.9%. With the -1.6% GDP growth in Q1 2022, we are now in a recession with two consecutive quarters of negative GDP growth. (The nominal GDP did grow 7.8% though but this number becomes negative after accounting for inflation.) Despite the numbers meeting the technical definition, both the Treasury Secretary and the Fed Chair think we are not in a real recession as we have a very strong job market and people still have savings.

If you look at the numbers more closely, consumer spending overall grew 1% with services up 4.1% but goods down -4.5%. This makes a lot of sense as people are shifting their expenses from goods to experiences once the lockdown is over. Private investment activity went down 13.5%!! As illustrated above, there’s quite a dramatic slowdown on “change in private inventories”, which means businesses slowed down replenishment of inventories. Walmart just issued a profit warning a few days ago about the changing consumer behavior and the inventory pileup in their stores. Businesses are not adding more inventories before they sell down the current pile. There’s also a -14% change in “residential investment”, which is house construction and improvement. With the mortgage rate going up so much, it’s no surprise that the construction activity is slowing down.

In summary, we are experiencing a service boom but businesses are adjusting to the new consumer behavior and the housing sector is slowing down. With the service sector booming and the labor shortage in that sector, most likely we will continue to have full employment in the near future. That’s why the top government officials think we are not in a real recession once the businesses are adjusting to the new consumer behavior. But my worry is that this could be a supply side recession where the service sector has strong demand but there are not enough healthy workers to fulfill that demand while people are less interested in buying things due to inflation. Coupled with the slowdown in business spending due to higher interest rates, higher labor cost and inflation, I think there’s still a lot of risk to the economy. I could understand the top government officials are trying to paint a rosy picture as the midterm election is approaching. But let’s call a spade a spade. We are in a recession.