The preliminary data, or “advance estimates,” show that real GDP decreased at an annual rate of 0.9 percent in the quarter.1
The contraction in real GDP reflected a sharp decline in gross private domestic investment -- non-residential investment on structures fell 11.7% and residential investment fell 14.0% -- but also declines in federal, state and local government spending, and private inventory spending.2 These were partly offset by personal consumption, which is a large part of real GDP, and exports.
A main message to take away from these data is that rising mortgage rates and declining growth expectations have had a major impact on the real estate sector.
Is the US in recession?
The data release has triggered an intense debate whether the US economy is in recession. That debate seems somewhat misplaced. It is plainly the case that the US economy is slowing; whether that slowdown is sufficiently pronounced to be classified as a recession may be of secondary importance.
In any case, the advance real GDP release is not sufficient to judge whether the economy is in recession. One reason is that data revisions can be very large. The average absolute revision between the “advance” and “latest” real GDP releases is 1.2%.3 Real GDP growth may therefore be much more negative than the just released advance data suggest, or it may be positive. It is too early to tell.
There has also been plenty of commentary about how the business cycle dating committee of the National Bureau of Economic Research (NBER) works.4 It should be noted that the NBER is not a government agency and that it is not assessing in real time whether the economy is in recession. Rather, its approach is retrospective. In making its peak and trough announcements, it waits until sufficient data are available to avoid the need for major revisions to its business cycle chronology.
Furthermore, the NBER does not identify economic activity solely with real GDP but looks more broadly at the economy, including at labour markets. In addition, it considers whether the depth of any decline in activity is sufficiently severe for it to classified as a recession. The NBER also focusses on monthly data. While the quarterly real GDP data are significant, the NBER attaches equal attention to real Gross Domestic Income which is published with some delay.
How will these data impact on US monetary policy?
A further question is how these data will impact on US monetary policy. While the Fed will surely pay close attention to them, like the NBER it will also look at other data series. These include real personal income less transfers, nonfarm payroll employment, employment as measured by the household survey, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, and industrial production. These data series generally show little evidence of recession.
Conclusions
Overall, the data provide further evidence that growth in the US economy is slowing. While it is too early to tell whether it is in recession, recession risks have plainly risen. The Fed is likely to interpret the real GDP data as further evidence that the US economy is slowing, but is not expected to change its outlook for the economy, which will remain highly sensitive to incoming data.