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US Weekly Economic Commentary: No recession through July

Economic data released last week strongly suggest that the US did not enter a recession in the first half and that real growth likely remained positive into July.

Real gross domestic income (GDI) — an income-based measure of broad economic activity — rose in both the first and second quarters of 2022, challenging the implication from declines in real GDP that the economy contracted in the first two quarters of the year.

Second-quarter GDP growth was revised up 0.3 percentage point, reflecting both an upward revision to final sales and less of a decline of inventory investment. Real gross domestic output (GDO) — the average of GDP and GDI — posted small increases in both the first and second quarters.

Separately, the goods deficit narrowed substantially in July, which largely accounted for a substantial upward revision to our forecast for third-quarter GDP growth.

Federal Reserve Chair Jerome "Jay" Powell on Aug. 26 reiterated the message that the Fed will continue to raise interest rates to bring inflation down. Data arriving in coming weeks on inflation, inflation expectations, and labor markets could influence the Federal Open Market Committee's decision about the size of the rate increase in September.

The most likely outcome is a rate increase of either 50 or 75 basis points; the latest favorable reports on inflation could tip the balance in favor of a rate hike of 50 basis points, as we assume. It will take a string of favorable inflation reports over several months before this group of monetary policymakers will consider pausing to assess whether they have tightened policy sufficiently to bring inflation down to 2% on a sustained basis.

We continue to anticipate the US will avoid an outright recession. Instead, it will experience a "growth" recession, defined as a period of below-trend GDP growth that causes slack to develop.

We are in the midst of updating our forecast to reflect all recent developments. On balance, we do not expect significant revisions to our prior forecast that GDP growth will remain positive but sluggish at a below-trend rate that will allow for slack to develop over time in labor markets.

Revisions to our third-quarter forecasts:

  • GDP growth: We raised our forecast by 1.0 percentage point to 1.4%. The upward revision mainly reflected a narrowing of the goods deficit in July, which implied more net exports in the third quarter than we previously assumed.

  • Business fixed investment in equipment: We raised our forecast as this figure is showing some resilience amid recent sharp increases in interest rates and tightening of bank lending standards.

  • Inventory investment: Some unexpected weakness in total manufacturing inventories lowered our forecast of third by a roughly offsetting amount.

  • Real personal consumption expenditures (PCE) growth: We lowered our forecast by 0.6 percentage point following a lower-than-expected increase in PCE in July.

  • Net exports: We added about $98 billion to our forecast following the share and unexpected narrowing of the trade deficit in July.

  • Residential brokers' commissions: We slightly raised our forecast after a sharp decline in new home sales in July and a higher-than-expected mean selling price.

This week's US economic releases:

  • Conference Board Consumer Confidence Index(Aug. 30): We estimate an increase in August from July.

  • Construction(Sept. 1): We estimate a smaller decline in July from June.

  • Nonfarm payroll employment (Sept. 2)

  • Light vehicle sales(Sept. 2): We estimate a slight increase from July.

  • Manufacturers' shipments, inventories and orders (Sept. 2)

Posted 30 August 2022 by Akshat Goel, Senior Economist, US Macro and Consumer Economics, S&P Global Market Intelligence and

Ben Herzon, Executive Director, Research advisory specialty solutions, S&P Global Market Intelligence and

Joel Prakken, Chief US Economist and co-head of US Economics, Research Advisory Specialty Solutions, S&P Global Market Intelligence and

Ken Matheny, Executive Director, Research Advisory Specialty Solutions, S&P Global Market Intelligence

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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