US economy contracts mildly in second quarter; no sign of recession in underlying data

Supply chain disruptions have left unfinished products on factory floors or at shipping docks. These products cannot be included in GDP until they go into inventories.
Image Credit: AP

Washington: The US economy contracted at a more moderate pace than initially thought in the second quarter as consumer spending blunted some of the drag from a sharp slowdown in inventory accumulation, dispelling fears that a recession was underway.

That was underscored by details of the report from the Commerce Department on Thursday, showing the economy growing steadily last quarter when measured from the income side. The underlying economic strength fits in with recent upbeat readings on the labor market, retail sales and industrial production.

“We have had a tremendous recovery, this is a mid-cycle slowdown and not a recession,” said Brian Bethune, an economics professor at Boston College. “Employment is still growing, which means basically, production is still growing, but there are these supply chain problems.” Gross domestic product shrank at a 0.6 per cent annualised rate last quarter, the government said in its second estimate of GDP. That was an upward revision from the previously estimated 0.9 per cent pace of decline. The economy contracted at a 1.6 per cent rate in the first quarter. Economists polled by Reuters had expected GDP would be revised slightly up to show output falling at a 0.8 per cent rate.

The two straight quarterly decreases in GDP meet the standard definition of a technical recession. But in the case of the US economy, the contraction in GDP is misleading, given the large role played by inventories.

Supply chain disruptions have left unfinished products on factory floors or at shipping docks. These products cannot be included in GDP until they go into inventories.

Inventories rose at a $83.9 billion rate last quarter after increasing at a $188.5 billion pace in the first quarter. They subtracted 1.83 percentage points from GDP. Consumer spending grew at a 1.5 per cent pace, revised up from the previously reported 1 per cent rate. Shortages and the resulting higher prices have crimped spending.

An alternative measure of growth, gross domestic income, or GDI, increased at a 1.4 per cent rate in the second quarter. GDI, which measures the economy’s performance from the income side, grew at a 1.8 per cent pace in the first quarter. It is calculated using corporate profits, compensation and proprietors income data.

While GDI and GDP can diverge from one quarter to the other, there has been no convergence since the end of 2020, leaving a huge gap of 3.9 percentage points. Over the long run GDP tends to converge toward GDI, though that is not a golden rule.

“Hopefully at some point we will have fewer supply chain disruptions and production will catch up,” said Bethune.

“Production will be higher than income, but we are a long way from that.” The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, increased at a 0.4 per cent rate in the April-June period, up from a 0.1 per cent growth pace in the first quarter.

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