Recession or Not, U.S. Economy Has Slowed Notably

The U.S. economy shrank by 0.9% at the annual rate in the second quarter, according to preliminary data, extending the decline of 1.6% seen in the first quarter. This has accelerated the debate over when or if the U.S. has entered a recession, with real GDP contracting for two straight quarters. Regardless of whether the U.S. economy is in a recession (or if it is slipping into one), it is consistent with an economy that is slowing notably.

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Looking specifically at the data, consumer spending on services and net exports were bright spots in the second quarter, with sizable drags stemming from inventory spending, nondurable goods consumption, residential fixed investment and government spending.

On the manufacturing front, there was mixed news in the economic releases last week. On the one hand, new orders for durable goods rose 1.9% to a record $272.6 billion in June, with all-time highs also seen for durable goods shipments and core capital goods orders and shipments. These data points are in nominal terms likely reflecting higher prices, but they are another indication that the manufacturing sector has remained resilient despite numerous challenges.

On the other hand, manufacturing sentiment surveys continue to reveal anxieties, often indicating the weakest assessments of activity in roughly two years. Last week, that included manufacturing surveys from the Dallas, Kansas City and Richmond Federal Reserve Bank districts. There were mixed perceptions about the outlook outside of the labor market, which was seen continuing to be solid in each region over the coming months.

The PCE deflator rose 1.0% in June, the fastest pace of monthly growth since September 2005. Excluding food and energy prices, the PCE deflator increased 0.6% in June, the most since May 2021. Overall, the PCE deflator has risen 6.8% year-over-year, the strongest increase since January 1982. Core inflation has increased 4.8% over the past 12 months, inching up from 4.7% in the prior release but down from 5.3% in February, which was the strongest since April 1983.

Core inflation should continue to moderate over the coming months, largely on more favorable comparison months. But core inflation should remain highly elevated and above the Federal Reserve’s stated goal of 2% over the long term. The current outlook is for the core PCE deflator to be 3.8% year-over-year in December.

As expected, the Federal Open Market Committee increased the federal funds rate by 75 basis points at the conclusion of its July 26–27 meeting, with the current range now at 2.25% to 2.50%. To put that in perspective, the range was 0% to 0.25% at the start of the year. The Federal Reserve continued to hike rates in an attempt to combat inflation, even as it sees signs of some softening in the economy.

There will likely be another 50-basis-point rate hike (or more) at the Sept. 20–21 FOMC meeting. Further increases—including at the Nov. 1–2 and Dec. 13–14 meetings—will hinge on incoming price and macroeconomic growth data.

Consumers continue to react to inflationary pressures in the economy, particularly as they see their purchasing power diminish. The Conference Board reported that consumer confidence fell to a post-pandemic low in July, and while the University of Michigan’s measure rebounded slightly in July, sentiment remains just shy of June’s record low.

With that said, personal consumption expenditures rose 1.1% in June, the strongest pace since March. Personal income increased 0.6% in June. With spending growth outpacing income, the personal saving rate fell from 5.5% to 5.1%, the lowest since August 2009. This suggests that, while consumer spending remains strong, Americans are dipping heavily into their savings to finance those purchases.

Finally, new single-family home sales fell 8.1% to 590,000 units at the annual rate in June, the weakest reading since April 2020. Higher mortgage rates and affordability have sharply dampened enthusiasm for new home sales. Single-family home sales have fallen 17.4% year-over-year, down from 714,000 units in June 2021.