U.S. 2Q GDP growth: Are we in a recession? U.S. 2Q GDP growth: Are we in a recession? U.S. 2Q GDP growth: Are we in a recession?

U.S. 2Q GDP growth: Are we in a recession?

Macro
Christopher Dembik

Head of Macroeconomic Research

Summary:  What is a recession ? This looks like an easy question. Most investors and analysts would answer that two consecutive quarters of negative GDP growth is the common rule-of-thumb definition of a recession. This is not quite that. That’s why even if today’s U.S. 2Q GDP growth is in contraction territory (after a negative print in 1Q at minus 1.4 %), this does not necessarily mean the United States is in a technical recession.


The U.S. Biden administration has prepared the ground for a negative U.S. 2Q GDP print. On 24 July, U.S. Treasury Janet Yellen confirmed GDP growth could be disappointing in 2Q. She is expected to host an (unusual) press conference later today after the GDP report. In a rather unusual move, the White House published a blog article entitled “How Do Economists Determine Whether the Economy Is in a Recession?",  on 21 July.

Let’s first ask the easy question: What is a recession?


The common rule-of-thumb definition in most countries is two consecutive quarters of negative GDP growth. In 1Q, U.S. GDP growth contracted by minus 1.4 % - see Chart 1. Based on the latest statistics (such as the housing market data with a drop of 30 % of new homes sales since December 2021 and 8.1 % only for the month of June), risks are tilted to the upside that growth will contract in 2Q too. This would mean that the United States is in a technical recession. However, this is not that straightforward. The official definition of a recession in the United States differs from other countries. The National Bureau of Economic Research (NBER), an independent body founded in 1920, is the official recession scorekeeper. It defines a recession as a “significant decline in economic activity that is spread across the economy and that lasts more than a few months”. Several variables are taken into consideration, such as: employment (both establishment and household survey), real consumer spending, real manufacturing and trade sales, industrial production and real personal income (excluding government transfers like unemployment insurance). Surprisingly, the NBER does not base much of its decisions on GDP. It is taken into account. But it plays a little role in assessing the reality of a recession. This is for good reasons. GDP is released only quarterly. It is subject to major revisions years after its first release. It can be skewed by a couple of sectors too. The issue of revisions is actually pertinent now. Many economists believe that U.S. 1Q GDP will be revised in positive territory ultimately (this makes sense based on gross domestic income data – which can be considered as an income-side estimate while GDP is a production-side estimate). Expect that private domestic final demand (which represents consumption + business fixed investment + residential) to be revised upward especially. This is our preferred metric at Saxo Bank since it is more correlated to future GDP growth. If this happens, the “two negative quarters” threshold (which matters so much for market participants) will certainly not be met. 

Now, let’s ask a second question: Are we in a recession?

Short answer: probably not judging by the main indicators the NBER and economists look at.

This does not mean that the United States will exit this cycle without going through a recession or a recessionette (term coined by the U.S. economist Diane Swonk to define a healthy contraction in GDP growth which brings down inflation). This will depend on several factors we cannot fully assess now, such as the speed of monetary policy tightening and its impact on the overall economy or the effect of the ongoing Chinese stimulus on the global economy. There is still a lot of uncertainty and lags which make it difficult to forecast the pace of the economy in the near future.

However, based on the indicators the NBER pays most attention (see the list below), we can all agree the United States is certainly not in a recession now. All of them are either still rising or have flatlined. But there is no significant decline. If we look at more real-time indicators (NBER’s indicators are mostly backward-looking), the economy still looks in a fine shape, though decelerating. The state of the labor market is not consistent with an economy in recession, especially. In June, the United States had recovered 98 % of jobs lost during the pandemic, and all private sector jobs lost at the start of the outbreak have been recovered. Unemployment has remained at its historic lows in 2022. Unemployment claims are up a bit. But this can be partially explained by seasonal noise. Job openings are slightly down. But they are still very high. There are cracks in the foundation of recovery forming, of course. No one can deny it (see our analysis about the U.S. housing market risks, Housing IS the business cycle, 23 June). There is also a lot of data noise due to the pandemic effect, which makes it harder than usual to read the economy too. However, these are not the signs of a recessionary economy, in our view. Therefore, we should certainly avoid over-interpreting today’s figures too much. They are volatile and highly subject to revision.
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.