The U.S. real gross domestic product (GDP) decreased 0.9% annually in the second quarter of 2022, after falling 1.6% in the previous three months, according to the U.S. Bureau of Economic Analysis (BEA). And the slowdown in the U.S. housing market was a major driver of the economic decline.

Two consecutive quarters of negative growth mark a “technical recession.” However, the Biden administration has argued that the American economy is not in a recession, based on a still strong labor market. 

According to the BEA, the U.S economy shrunk, driven by decreases in private inventory investment, mainly general merchandise stores and motor vehicle dealers, and declines in residential fixed investment, especially broker’s commissions.  

Government also decreased its spending during the second quarter. The federal government sold crude oil from the Strategic Petroleum Reserve, which resulted in declines in consumption expenditures. State and local governments reduced their investments in structures. 

The BEA also reported that increased imports reflected growth in services, led by travel. Meanwhile, the U.S. increased its exports of goods (led by industrial supplies and materials) and services (led by travels). 

The current dollar GDP reached $24.85 trillion in the second quarter. But the data released Thursday is subject to further revision and a second estimate will be released on August 25.  

Despite the decrease in activity, personal income increased 1% in the second quarter, a slowdown from 1.8% in the previous three months, but still strong due to increases in wages and salaries, proprietors’ income, personal income receipts on assets and rental income. 

“Consumer spending on goods is growing more slowly, and consumer spending on services is picking up. This is an ongoing normalization as the effects of the pandemic wane,” Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association (MBA), said in a statement. 

The housing market, in contraction largely due to the Fed‘s tightening monetary policy, contributed to the decline in the GDP. Residential investment dropped at a 14% rate last quarter, contributing -0.7% to the decrease in GDP. 

“Housing tends to lead the rest of the economy, and we expect that pattern will hold this cycle as well,” said Fratantoni. 

On Wednesday, the Federal Reserve Open Markets Committee raised the federal funds rate by 75 basis points, to 2.25%-2.50%, noting that spending and production have softened, but job gains have been robust in recent months.  

During a news conference following the Fed’s committee meeting, Chairman Jerome Powell said, “I do not think the U.S. is currently in a recession, and the reason is too many areas of the economy are performing”. – He cited the labor market is an example.   

“The headline of a second straight decline in real GDP highlights the abrupt change in the path of the U.S. economy, but the ongoing strength in the job market and other signs of growth makes it unlikely that this will be categorized as a recession at this point,” said Fratantoni. 

The MBA forecasts 0.6% in the GDP for 2022, with downside risk as the full impact of the Fed’s rapid rate hikes is realized over the next 12 months.

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