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Second Quarter GDP Estimate

August 19, 2022

Due to a second consecutive quarter of GDP decline, the economy is in a recession, per one definition. But are businesses' current challenges typical of a recession? Tune in to the latest episode of TrendsTalk with ITR Economist and Speaker Lauren Saidel-Baker to learn more.



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The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.

Hi. I'm Lauren Saidel-Baker. And welcome to this episode of ITR Economics TrendsTalk. Today, we're talking about the elephant in the room: that second quarter GDP estimate. Let me start by saying that no, we at ITR Economics did not expect that second consecutive quarter of negative GDP growth. We had expected GDP to move a little bit flatter. Still expecting expansion, but at a much slower growth rate than we'd seen in 2021.

However, I do want to acknowledge that while this second consecutive quarter of GDP decline meets one commonly accepted definition for a recession, it isn't the official technical definition. There is a group of economists called the National Bureau of Economic Research. And they're the ones that will or will not designate this period in history as a recession. It will be some time before we get that final decision. But in my mind, that's largely a different issue.

It's almost an academic issue. Because the problems businesses are facing today, well, they don't feel like typical recession problems. If I were to ask you, "What are the biggest challenges you face?" I'm hearing two main issues. One of them is the labor market. It's incredibly tight. Unemployment is incredibly low. It's hard to find good workers. That's not a typical recession behavior. And the other is the supply chain. There's too much demand supply. Can't keep up. We have backlog still building. Again, that's not a typical recession behavior.

So, let's put the magnitude in context. If we look at those two consecutive quarters of GDP decline, you might note that the first quarter and second quarter of 2022, coming down from that fourth quarter calendar year 2021 high, they were, yes, both negative, but very, very small drops. The magnitude of that decline, in fact, was actually less in both quarters put together than the GDP growth that we saw from the third quarter to the fourth quarter of last year.

So, we've grown more in just one quarter than we lost in two put together. Additionally, our consumer is still very strong. So, while technically we did hit that two-quarter mark, it wasn't that our consumer pulled back, at least not significantly. It almost looks like we had grown too much or too quickly in 2021 and just couldn't quite sustain that same level. A lot of this pullback, this flattening did come on the heels of the stimulus payments. Those didn't repeat, so our consumer didn't get the same boost that they had back in 2020 and 2021. But we still have, as I mentioned before, low unemployment. More people have more jobs. And wages are rising, so incomes are still increasing.

But let's couple that with this slowing or slight decline in the macro economy. And what that means to me is easing demand pull. Again, this was a minuscule drop. It wasn't a cliff that we're collectively falling off of. So, that easing demand pull has important implications for things like the supply chain. Again, that other of the two big issues businesses are facing. The supply chain should be normalizing in the near term. With that easing demand, we'll start to find some more normal relationships. Now, they won't look exactly like they did leading up into the pandemic, but they should be a bit more stable. At least what we're hearing on the ground is that the problems have largely stopped getting worse. And we might even start to see logistics issues get better.

The other item is prices. With lower demand pull, without that liquidity injection that we saw with the stimulus and throughout the pandemic experience, inflation should transition to disinflation in the near term. So, this is looking like a much more normal economic footing. And if your business is not reflective of that consumer experience, I would encourage you not to focus too much on the GDP reading. Gross domestic product is driven about two thirds by consumer spending. So, if you're in the manufacturing or in the industrial side of the world, the good news is our forecasts are still very much in place for you. Our industrial production expectation here in the US, we've had that forecast in place for more than two years now. And the results are still coming in largely as we expect. We have no reason to think that is not the most likely outcome for the industrial sector.

So, looking for, again, that slowing growth, but largely a soft landing at the low of this cycle. We at ITR promise to always be transparent with you. We want you to know when we get things right and when we get things wrong. But currently, the magnitude of this miss in GDP looks like we'll close out this calendar year, 2022, around a 1.3% difference.

And really, what I'm looking at is not that technical definition. We won't know for a while whether this was technically a recession or was not. And I would argue, that distinction, it really doesn't matter, except maybe academically. What matters is how it affects you and your business. So, pay attention to those indicators, your own leading indicators. And whether it is or isn't a recession, we'll find out probably long after we are out of it. But what you do today, how you drive your opportunities going forward, that's what should stick with you. As always, let us know if we can help you here at ITR Economics. And thank you so much for joining me today. I'm Lauren Saidel-Baker for this episode of TrendsTalk. Let's talk again soon.


Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.