Is the U.S. Economy in a Technical Recession? We’ll Find Out This Week

On Thursday, the U.S. Bureau of Economic Analysis will release its preliminary estimate for U.S. gross domestic product (GDP) growth in the second quarter of the year, which consists of the three months between April 1 and June 30. The data is important because it provides investors with a snapshot of how the U.S. economy performed in that three-month window.

The report Thursday will be particularly interesting because it could show that the U.S. economy entered an unofficial recession in the second quarter, which could have a whole range of consequences for the broader market. Let me explain.

What to expect

After growing by nearly 7% in the fourth quarter of 2021, the U.S. economy contracted by 1.6% in the first quarter of 2022. Two quarters of negative GDP growth is considered by many on Wall Street (as well as some economists) to be the standard indicator that the country is in a recession, even though there are many more factors economists take into consideration before declaring an actual recession.

Right now, experts are expecting a range of outcomes, from another decline in GDP in Q2 to a very modest increase.

Image source: Getty Images.

Earlier this month, Goldman Sachs trimmed its GDP growth expectations to just 0.7% for Q2. However, the Atlanta Fed GDP Now tracker, which measures economic data in real-time and which has had a very small margin of error since its inception, recently measured a GDP decline of 1.6% in Q2. The consensus estimate among economists is a slight 0.3% GDP gain.

“Who knows? We could get a back-of-the-envelope recession with the next GDP report. There’s a 50/50 chance the GDP report is 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, with the Federal Reserve’s July meeting also taking place Tuesday and Wednesday. The Fed is widely expected to raise its benchmark overnight lending rate, the federal funds rate, by 0.75% at the meeting, but investors will likely be looking for clues in the Fed’s comments regarding its policy actions going forward and its views on the overall economy.

Obviously, a negative GDP report and a technical recession would not be ideal, but it still may not lead to a formal call that the U.S. economy is in a recession. For one, the U.S. unemployment rate remained at a very strong 3.6% in June. And according to many of the large U.S. banks that reported earnings last week, consumer spending, particularly in travel and entertainment, remained strong in the second quarter of the year. While most bank executives expect economic conditions to deteriorate later this year, they simply aren’t seeing any sign of credit degradation among their customer base.

Still, a negative GDP report may heighten concerns among investors that things could get a lot worse later this year or next year because most expect the U.S. economy to slow down as a result of the Fed’s rate hikes, which can take some time to really seep into the economy. If we are in a technical recession now, perhaps investors are worried about a more severe recession later on.

All recessions are different

Recessions can range widely. Some are severe and others are modest. Some last years and some last months. If Thursday’s GDP report shows the economy is in a technical recession, I do not think it’s the end of the world. But it could indicate that the U.S. could enter a more severe recession later down the line, which could lead to a sell-off of stocks.

Most experts and analysts expect to see some kind of recession at some point connected to this current economy, but a modest recession may not end up being that bad and could bring down prices on items like gasoline, rent, and food, which have dogged consumer finances this year. Either way, the data coming out Thursday will give investors more insight into how the economy might fare over the next six to 12 months, so investors should definitely be paying close attention.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs. The Motley Fool has a disclosure policy.

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