GDP shrank an annualized 1.6% in the first quarter, and some experts anticipate another drop in the second quarter.
Concern is growing that the Federal Reserve’s interest-rate increases will throw the economy into a recession.
GDP shrank an annualized 1.6% in the first quarter. And the government reported that personal consumption expenditures, adjusted for inflation, fell for the first time in May, by 0.5% from a month earlier.
Consumer spending accounts for more than two-thirds of GDP, so that’s a problem. Some economists anticipate the economy contracted in the second quarter as well.
Former Treasury Secretary Lawrence Summers, now a Harvard economist, has regularly sounded the alarm bell in recent months about the potential for recession.
And he’s only growing more worried. “The risks of a 2022 recession are significantly higher than I would have judged six or nine weeks ago,” he told Bloomberg July 1.
Summers has noted that at no time in the past 65 years has inflation stood above 4%, unemployment stood below 5%, and the economy failed to enter recession within the next two years.
Consumer prices soared 8.6% in the 12 months through May, and unemployment registered 3.6% in May.
A recession could emerge as a “self-fulfilling process coming out of the high inflation and reductions in people’s incomes” Summers told Bloomberg. Disposable personal income, adjusted for inflation, slipped 0.1% in May.
Meanwhile, JPMorgan Chase economists have lowered their economic growth projections. “Our forecast comes perilously close to a recession,” Michael Feroli, the bank’s chief U.S. economist, wrote in a commentary, as cited by Bloomberg.
“However, we continue to look for the economy to expand, in part because we think employers may be reluctant to shed workers, even in a period of soft product demand.”
Reduced Growth Forecast
Feroli trimmed his prediction for second-quarter growth to 1% from 2.5%. And he reduced his third-quarter forecast to 1% from 2%. To be sure, he sees growth rebounding to 1.5% in the fourth quarter, buoyed by falling inflation.
National Retail Federation Chief Economist Jack Kleinhenz also believes the economy will avoid recession. “I am not betting on an official recession in the near term, but the most recent research pegs the risk over the next year as about one in three,” he said in a statement.
“It will be touch and go in 2023. In the meantime, a contracting economy short of a recession is not out of the question.”
The National Bureau of Economic Research officially determines when there’s a recession. It defines a recession as “involv[ing] a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
As for Kleinhenz, he said the consumer outlook “remains favorable” for the next few months, despite the economy’s difficulties. “Increased income from employment gains, rising wages and more hours worked is expected to support household spending,” he said.
On Wall Street Friday, stocks kicked-off the second half of the trading year in much the same way they exited the first: focused in the impact inflation will have on growth prospects for the world’s biggest economy.
The S&P 500, the broadest measure of U.S. stocks, ended the first half with a 20.58% decline, entrenching the benchmark in bear market territory and capping the worst January to June slump since 1970.
The contextual declines for the Dow and the Nasdaq were even worse, with the tech-focused benchmark suffering its biggest half-year decline on record while the Dow fell the most, in percentage terms, since 1962.