Are we already in a recession? GDP shows that the economy has contracted for two consecutive quarters

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Real gross domestic product (GDP) contracted at an annual rate of 0.6% in the second quarter of 2022, according to the second – or revised – estimate released by the Bureau of Economic Analysis (BEA) on Aug. 25 by 0.3 percentage points revised upwards and represents an improvement on the first quarter when real GDP contracted by 1.6%.

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“The GDP estimate released today is based on more complete source data than was available for the ‘advance’ estimate released last month. In the preliminary estimate, the contraction in real GDP was 0.9%,” the BEA said in a press release. “The update primarily reflects upward revisions in consumer spending and residential inventory investment, partially offset by a downward revision in residential investment.”

Despite the upward correction, the economy has contracted for two consecutive quarters, which would technically mean the economy is in recession. But whether or not we’ve already entered a recession depends on who you ask.

According to the National Bureau of Economic Research (NBER), whose economists are the ones who explain whether the country is actually in a recession, such a phenomenon occurs when there is “a significant decline in economic activity spread across the Economy extends and lasts more than a few months.” It adds, however, that “because a recession needs to affect the economy broadly and not be confined to one sector, the committee emphasizes economy-wide measures of economic activity.”

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Rusty Vanneman, Chief Investment Strategist at Orion Advisor Solutions, told GOBankingRates: “It was nice to see that this morning’s second estimate of GDP continues to improve, with the latest figure being -0.6% better than the original estimate and the consensus outlook.”

“Nevertheless, it’s still not enough to change the current economic narrative,” Vanneman added. “Recession and inflation risks are still the top concerns of many investors, and most are still focused on what might be said at this week’s Jackson Hole Economic Symposium. Some are hoping that the Fed will refrain from aggressively raising short-term interest rates, but that doesn’t seem likely at this point and today’s data won’t help that argument.”

Real GDP contracted less in the second quarter than in the first quarter, driven by an increase in exports and a smaller contraction in government spending, partially offset by a larger decline in private inventory investment, a slowdown in consumer spending and declines in non-residential fixed investment and residential investment, the BEA said in the press release.

In terms of future quarters, following President Joe Biden’s student loan decree on Aug. 24, Goldman Sachs says the plan will have a small impact on economic growth and inflation.

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“This modest reduction in debt payments as a percentage of income implies only a modest increase in GDP,” Goldman Sachs chief economist Jan Hatzius wrote in a note to GOBankingRates. “Compared to a counterfactual where debt forbearance ends and normal debt payments resume, our estimates imply a 0.1 percentage point increase in GDP in 2023 with a smaller impact in subsequent years due to natural maturing of student loans as well as ongoing growth in nominal GDP.”

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About the author

jael Bizouati-Kennedy is a full-time financial journalist and has written for several publications including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She has also worked as a Vice President/Senior Content Writer for major financial firms based in New York, including New York Life and MSCI. jael is now a freelancer and most recently worked together with Dr. Sean Manion authored the book Blockchain for Medical Research: Accelerating Trust in Healthcare. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.