An increase in interest rates driven by 41-year high inflation, curtailed U.S. consumer spending growth in the first half of 2022.
U.S. GDP shrank by 0.6 percent in the second quarter, below the initially reported 0.9 percent, according to the Bureau of Economic Analysis’s revised report released on Aug. 25.
The economy had already shrunk by 1.6 percent in the first quarter, the worst GDP figures since the height of the pandemic in the spring of 2020.
The positive changes in the revised report appear to have originated from new data on consumer spending, which was revised higher from 0.70 to 0.99 percent.
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Consumer spending, which accounts for two-thirds of GDP, was followed by a growth in exports like industrial supplies and materials, travel, and food services.
GDP saw declines in inventory investment, housing investment, federal government spending, and state and local government spending for the second quarter.
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The revised personal consumption expenditure (PCE) index grew 7.1 percent in the second quarter, at the same rate as in the first, while the PCE core price index, which excludes food and energy, grew 4.4 percent, after increasing 5.2 percent in the previous quarter.
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According to the National Bureau of Economic Research (NBER), a semi-official nonprofit that tracks economic downturns, a recession is technically defined by two consecutive quarters of negative economic growth, led by high unemployment, poor GDP growth, declining personal income, and sluggish retail sales.
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Two-quarters of negative growth technically places the U.S. economy into the definition of a recession because of a “significant decline in economic activity that is spread across the economy and that lasts more than a few months,” according to the NBER.
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Nonetheless, unemployment and consumer spending, which are the two primary benchmarks used by the NBER to define whether the economy is in a recession, remained strong in the first half of the year.
In the meantime, the Federal Reserve is expected to raise the interest rates at its next meeting in September, while it estimates how quickly it can raise interest rates in order to tame inflation without crushing economic growth.
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“US GDP was confirmed to have contracted, GDI (which should equal GDP) rose further in Q2, making the gap between them ever wider,” announced Patrick Zweifel, chief economist at Pictet Asset Management in a tweet.
“As historical revisions have moved GDP towards GDI, Sep annual revision should make a Fed pivot even more unlikely to happen soon,” stated Zweifel.
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