Why the U.S. economy shrank

GDP fell at a 0.9% annualized rate between April and June

Contributors to GDP change in Q2 2022

+1 percentage points

Personal consumption pushed GDP up 0.7 ppt

Private

investment

0

Imports

Exports pushed GDP up 1.9 ppt

Business inventory decreased, pushing GDP down -2 ppt

-1

-0.9%

overall

change

-2

Government

spending

Contributors to GDP change in Q2 2022

+1 percentage points

Personal consumption pushed GDP up 0.7 ppt

Private

investment

0

Exports pushed GDP up by 1.9 ppt

Imports

Business inventory decreased, pushing GDP down -2 ppt

-1

-0.9%

overall

change

-2

Government

spending

Contributions to quarterly GDP change in Q2 2022

+1 percentage points

Personal consumption rose in Q2 2022, pushing GDP up 0.7 ppt

Private

investment

0

Imports

Businesses sold off inventory, pushing GDP down by -2 ppt

-1

-0.9% overall

change

Exports grew, driving up GDP by 1.9 ppt

-2

Government

spending

Contributions to quarterly GDP change in Q2 2022

+1 percentage points

Personal consumption rose in Q2, pushing GDP up 0.7 ppt

Private

investment

0

Imports

Reduced inventory among businesses pushed GDP down by -2 ppt

-1

-0.9% overall

change

Government

spending

Exports grew, driving up GDP by 1.9 ppt

-2

The U.S. economy shrank at an annualized rate of 0.9 percent between April and June, marking two consecutive quarters of negative growth. Six months of contraction usually signals a recession.

The contraction comes as other markers of the economy — such as the job market and consumer spending — are still showing signs of strength. That leaves policymakers, economists, businesses and families to make sense of how the economy is doing, and what the latest GDP report tells us about where we go from here.

Here are some ways to think about the economic growth data, against the backdrop of high inflation, a tight labor market and growing risks of a recession.

What’s behind the 0.9% figure?

To recap, the U.S. economy abruptly shrank at the beginning of the pandemic, then boomeranged in 2021. Last year, the economy grew by 5.7 percent, the fastest full-year clip since 1984.

Economists didn’t expect the economy to keep that same momentum this year, as federal stimulus programs wore off, and the Federal Reserve moved to raise interest rates to slow growth and get a handle on soaring prices. But many were still caught off-guard by the stark reversal in the first three months of this year, when the economy slowed by an annualized rate of 1.6 percent. Businesses were cutting back on inventory purchases after overstocking for the holidays, and imports far outpaced exports. At the time, economists widely dismissed that slump as a fluke: Consumer spending — which makes more than two-thirds of the economy — remained healthy, and there were few signs of overall deterioration.

But the economy appears to have taken a turn for the worse. The second-quarter GDP report shows declines across many parts of the economy, spanning both businesses and households, and could signal that the country is already in a recession.

It isn’t a done deal, though. The official recession call will be made by a panel of experts at the National Bureau of Economic Research (NBER), which will take into account a number of factors such as unemployment (which is near record lows) and personal income levels (which are declining).

Drop-off in inventory purchases

After stocking up on too many goods last year — and miscalculating just how much stuff Americans would want to purchase — retailers are buying fewer items for their shelves. That slowdown in inventory purchasing, particularly for cars, is one of the big factors driving the second-quarter drop in GDP.

Big-box retailers such as Target and Gap have all reported they have far more inventory than they need, which is why they aren’t loading up on more.

But the looming problem is there’s new evidence that inflation is changing the way families are shopping, buying more necessities and fewer goods such as clothing and electronics, which is also reflected in the GDP report. Walmart rattled markets this week, when it slashed its quarterly and full-year profit forecasts. They said they could lose money because families are buying fewer of the things that Walmart tends to make money on, which could also happen at other retailers as demand weakens. That could lead to a bigger drop-off in inventory purchases in coming months.

‘Everything is halted’: Shanghai shutdowns are worsening shortages

Slowdowns in construction

The Federal Reserve has raised interest rates four times this year, most recently Wednesday, in hopes of calming the economy enough to curb inflation. One of the most direct impacts of those rate hikes has been a slowdown in housing and construction.

As the cost of lending gets more expensive, that means loans to housing developers and would-be homeowners are also getting a lot more expensive. Indeed, housing starts in June fell to a nine-month low, and permits for new construction also fell, according to Commerce Department data from last week.

Indeed the GDP report also showed that activity in single-family construction fell. Still, multifamily construction gained ground as rising rents burnish the appeal of apartment projects, cushioning the overall decline.

Construction and investments in homes, as well as other types of buildings including hotels, warehouses and factories, contributed to the second-quarter contraction. There were notable declines in related areas, such as brokers’ commissions, that played a role in the shrinking economy.

Declining government spending

Government spending declined at all levels: federal, state and local.

Although defense spending rose, it was outweighed by a pullback in other types of spending such as stimulus payments.

At state and local levels, governments pulled back on investments in new buildings.

The other major forces in the economy

The GDP report comes as policymakers and economists are grappling with two major issues in the economy: soaring inflation and a tight labor market.

Inflation has risen to the highest levels in 40 years, with prices rising 9.1 percent in June compared with the year before. The Fed is racing to get control of rising prices before they become even more embedded in the economy. Republicans are hammering the Fed for being too slow to respond and are placing much of the blame on Democrats’ sprawling stimulus efforts from last year.

Meanwhile, the job market has shown tremendous strength since losing 20 million jobs at the beginning of the pandemic. The unemployment rate remains remarkably low — 3.6 percent — and the job market has been a huge talking point for the Biden administration. But economists and policymakers also worry the job market is unsustainably hot. There are far more job openings than job seekers, and the mismatch has the Fed trying to tamp down demand for workers without causing people to lose their jobs.

Loading...
Loading...