On Thursday, the US Bureau of Economic Analysis will release its preliminary estimate for US gross domestic product (GDP) growth in the second quarter of the year, which consists of the three months between April 1 and June 30. Data Matters provides investors with a snapshot of how the US economy is performing over this three-month window.
Thursday’s report will be particularly interesting as it could show that the US economy entered an unofficial recession in the second quarter, which could have a host of ramifications for the broader market. let me explain.
What to expect
After growing nearly 7% in the fourth quarter of 2021, the US economy shrank by 1.6% in the first quarter of 2022. Two quarters of negative GDP growth is viewed by many on Wall Street (as well as some economists) as the standard indicator that the country is in recession, although there are many other factors that economists consider before declaring an actual recession .
Currently, experts are expecting a range of outcomes, from a further decline in GDP in the second quarter to a very modest increase.
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earlier this month, Goldman Sachs cut its GDP growth expectations to just 0.7% for Q2. The Atlanta Fed’s GDP Now tracker, which measures real-time economic data and has had a very low margin of error since inception, recently measured a 1.6% fall in second-quarter GDP. The consensus estimate among economists is a slight increase in GDP of 0.3%.
“Who knows? We could get a recession behind the envelope with the next GDP report. There is a 50/50 chance the GDP report will be negative,” Leo Grohowski, Chief Investment Officer at Bank of New York Mellon Wealth Management told CNBC last week.
What would it mean?
It’s going to be an interesting week as the Federal Reserve’s July meeting is also on Tuesday and Wednesday. The Fed is widely expected to raise its benchmark federal funds rate by 0.75% at the meeting, but investors are likely to look for clues in the Fed’s comments on its future policy actions and its views on the future search overall economy .
Obviously a negative GDP report and a technical recession would not be ideal, but it may not result in a formal call that the US economy is in recession just yet. For one thing, the US unemployment rate stayed at a very strong 3.6% in June. And consumer spending, particularly in travel and entertainment, remained strong in the second quarter of the year, according to data from many major US banks that reported earnings last week. While most bank executives expect economic conditions to deteriorate later this year, they simply see no sign of credit deterioration from their customer base.
Still, a negative GDP report could increase investor concerns that things could get much worse later this year or next, as most expect the US economy to slow as a result of Fed rate hikes, which has been around for some time may take time before it really trickles down into the economy. If we are in a technical recession now, investors may worry about a more severe recession down the road.
All recessions are different
Recessions can go far. Some are strict and others are humble. Some of the last few years and some of the last few months. If Thursday’s GDP report shows the economy is in a technical recession, I don’t think it’s the end of the world. But it could indicate that the US could enter a more severe recession later, which could lead to a sell-off in stocks.
Most pundits and analysts expect some sort of recession related to this current economy at some point, but a modest recession might not be as bad and could drive down prices on items like gas, rent and groceries that have kept consumers stubborn about finances this year . In any case, the data released on Thursday will give investors more insight into how the economy could develop over the next six to 12 months, so investors should definitely pay close attention.
Bram Berkowitz does not hold any of the shares mentioned. The Motley Fool has positions in Goldman Sachs and recommends Goldman Sachs. The Motley Fool has a disclosure policy.
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