Vantage Point: Economic Outlook  

What’s happening to the US economy?

What’s happening to the US economy?

The US economy has recorded two consecutive quarters of negative GDP growth and the economy is ”slowing materially, according to Pimco’s North American economist Tiffany Wilding.

In the second quarter of this year, US GDP growth was negative to the tune of 0.9 per cent. 

Wilding said that while factors such as Covid-19 were responsible for the decline in the first quarter, it was more traditional, and fundamental, reasons which caused the slowdown in the second quarter. 

She said: “The print came in worse than many expected due to higher prices and somewhat weaker consumption weighing on real activity.

"Unlike Q1, where trade and Covid-related noise were primarily responsible for the negative GDP print, Q2 highlighted that underlying economic momentum has also slowed materially.

"Final private domestic demand cooled from 3 per cent quarter on quarter in the first quarter to 0 per cent in the second quarter as interest rate sensitive sectors including durables consumption and fixed investment [declined]."

While the consensus among market participants is that two consecutive quarters of negative GDP growth constitutes a recession, in the US, national statistics agency, the NBER, use a wider range of indicators.

For this reason, Wilding said the still very low unemployment rate in the US means officially the government may not declare the country to be in recession.  

Rob Clarry, investment strategist at Evelyn Partners, said: “After the White House took the unusual step of releasing a blog on its website last week that outlined the definition of a recession, speculation that we would see US GDP fall for a second quarter in a row, resulting in a ‘technical recession’, started to increase.

"This release proved this speculation to be well founded, as the US economy contracted by 0.9% on a quarter-on-quarter (annualised) basis."

This was driven by weak readings for investment, government spending, and inventories. However, importantly, consumer spending held up.

According to Clarry, this was the most important indicator of underlying growth. He said: "This can be taken as a positive from a disappointing set of data. In addition, labour markets remain robust providing further support to the economy.”

But Wilding also said the outlook for the US economy was negative in the near term, noting that the latest GDP report pointed to private sector demand continuing to fall as inflation persists.

While the GDP figures highlighted above show the private sector’s growth was 0 per cent, ie not a negative number, overall GDP growth was minus 0.9 per cent, indicating that a decline in public sector activity caused GDP to drop. 

This could be explained by the end of, or reduction in, covid related spending by the government. 

Clarry added the full impact of higher interest rates on the US economy would not be felt for between 12 and 18 months, he still expects the US to avoid recession, at least in the way recession is now defined by the official US statisticians.