Financial Poise

GDP Falls for Second Quarter in a Row, Supercharging Recession Worries

It’s been a rough and tumble few days on the economic data front.

As was expected, the Fed announced a 75 basis point rate hike yesterday in an ongoing high-wire act that attempts to balance a battle against inflation with efforts to prevent a recession. The markets knew it was coming and had baked the news into pricing, continuing a five-day climb on the back of decent earnings and projections out of companies like Pfizer. The Biden administration, for their part, emphasized several optimistic data points on the jobs front to push back against the idea that we were in a recession. 

For a moment, we might have felt a little relieved or even hopeful. Then came this morning, with the Federal Reserve announcing a second straight quarter of economic contraction. GDP fell 0.9% in Q2, in sharp contrast with market expectations of modest growth.

We’ve written before about how recessions are often publicly understood as two straight quarters of economic contraction but are technically determined by experts parsing multiple data points. That’s part of why the Biden administration can spin things one way while bearish analysts can argue another. Still, the two-quarter litmus test is worth considering.

Surveying the Economic Numbers

There are other data points which further support bracing for a storm.

There are two other compounding factors to consider in this situation: global trends and domestic politics.

Context is Key

If you look back through history, the most severe economic downturns came during periods of global contraction. Unfortunately for us, that’s looking like the case today, as well. As the IMF reports:

The global economy, still reeling from the pandemic and Russia’s invasion of Ukraine, is facing an increasingly gloomy and uncertain outlook. Many of the downside risks flagged in our April World Economic Outlook have begun to materialize.

Higher-than-expected inflation, especially in the United States and major European economies, is triggering a tightening of global financial conditions. China’s slowdown has been worse than anticipated amid COVID-19 outbreaks and lockdowns, and there have been further negative spillovers from the war in Ukraine. As a result, global output contracted in the second quarter of this year.

Under our baseline forecast, growth slows from last year’s 6.1% to 3.2% this year and 2.9% next year, downgrades of 0.4 and 0.7 percentage points from April. This reflects stalling growth in the world’s three largest economies—the United States, China and the euro area—with important consequences for the global outlook.

In the United States, reduced household purchasing power and tighter monetary policy will drive growth down to 2.3% this year and 1% next year. In China, further lockdowns, and the deepening real estate crisis pushed growth down to 3.3% this year—the slowest in more than four decades, excluding the pandemic. And in the euro area, growth is revised down to 2.6% this year and 1.2% in 2023, reflecting spillovers from the war in Ukraine and tighter monetary policy.

One could argue this is a kind evaluation of current circumstances, but beyond that, it is accompanied by another potential contributor to economic chaos: American politics in a midterm election year.

We’re not placing any bets on that front or offering any guidance. It’s context worth noting, though. Analysts remain relatively confident that we’ll see upheaval in terms of Congressional control, even if only considering Biden’s current approval ratings and history in general. And while politics tend to have less of an impact on the economy than policy, this sort of tectonic shift in political control could lead to the sorts of policy moves that generate significant volatility. The economy dipping while inflation jumps might all but guarantee such a result. Should market volatility spike in the middle of uncertainty about what sort of policy is about to come out of a highly polarized political climate, the middle class could shoulder the bulk of the hit.

So… What’s Next?

Broadly speaking, things don’t look great. There are additional economic reports coming out in the next week related to inflation, consumer spending, and new job openings which may provide more color. Even so, the direction of things seems to indicate the most prudent course of action is caution. As we’ve said before, though, panic is not the answer. Your best bet is to seek the guidance of a financial profession, ask questions, express concerns, and advocate for yourself relative to your current risk tolerance.

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure and each includes a comprehensive customer PowerPoint about the topic):

This article was written and edited by Lauren Nelson]

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