US: Technical recession? Full recession? – UOB

Senior Economist at UOB Group Alvin Liew reviews the latest advanced Q2 GDP figures in the US economy.

Key Takeaways

“The advance estimate of US 2Q GDP surprised on the downside with a 0.9% q/q SAAR contraction (from -1.6% in 1Q), first back-to-back sequential decline of GDP since 1H 2020 during the onset of the COVID-19 pandemic, and thus, met the standard criteria of technical recession. But this remains far from the consideration of a full recession as there are parts of the economy still expanding.”

“The fall in 2Q GDP was attributed to decreases in private inventories, residential fixed investment, federal government spending, state and local government spending, and non-residential fixed investment (business spending). This was partly offset by the smaller increase in private consumption expenditure and a rebound in net exports. A particular concern was the fall in US personal saving rate to 5.2% in 2Q (from 5.6% in 1Q), the lowest rate recorded since 2008. Coupled with the lower-than-expected PCE increases in 1H 2022, the lower savings rates was seen as a sign of how the accelerating inflation is eating into spending, and this is something that will need to be monitored as accelerating inflation could further impair spending.”

“Taking into account the disappointing 2Q decline, we now expect full year GDP growth to be lower by another 0.2 ppt to 1.8% in 2022 (from previous forecast of 2.0%) and easing further to 1.5% in 2023 (unchanged from previous) which is below trend growth that we estimate at 1.8%. The growth outlook is a reflection of worsening assessment of the negative impact on growth due to the elevated inflation situation and the aggressive Fed rate hikes That said, the risk of a 2023 recession has risen in tandem with the aggressive Fed tightening cycle.”

“FOMC Outlook: The 1H GDP contraction does not change our Sep FOMC outlook for a 50bps rate hike. If anything, the sub-par growth outcome will diminish the risk of continued ‘larger than usual’ hikes but the need to tame elevated inflation means that the Fed will still continue with raising interest rates for the remainder of this year, just not in the clips of 75bps or more.”