OPINION
Market Rating Before FOMC MeetingJan 31
The World's Largest Economy is in Recession
According to the preliminary data released by the Bureau of Economic Analysis, BEA, the US economy contracted by 0.9 percent in the second quarter compared to the previous quarter, and grew by 1.6 percent year-over-year.
The U.S. economy is in an economic recession when gross domestic product (GDP), which was at a negative level of 1.6 percent in the first quarter of the year, contracted at a level of 0.5 percent, despite the expectation of a quarter-over-quarter increase in markets by 0.9 percent. During this period, GDP increased by 7.8 percent annually and was reported as 24.85 trillion dollars.
According to BEA, the GDP price index stood at 8.9 percent in the second quarter after 8.2 percent in the first quarter, while the personal consumption expenditures price index (PCE) increased by 7.1 percent. During this period, the Core PCE decreased to 4.4 percent from 5.2 percent in the previous quarter. In addition, against the backdrop of real disposable personal income, which fell by 6.6 percent, real consumer spending increased by 1.0 percent.
According to BEA, the decrease in real GDP was influenced by the decrease in private inventory investments, housing investments and federal government expenditures. On the other side, increases in personal consumption expenditures were partially balanced due to the exports.
The GDP report shows that in the world's largest economy, the impact of the war in Ukraine and the lockdowns in China is extremely limited. It is also extremely surprising that despite the fluctuation in commodity prices, we observed a decline in inventories.
At this point, we believe that the most drastic tightening move of the US Federal Reserve, which started in March with a 150 basis point increase in interest rates at the June and July meeting, is the main driver. However, despite the higher borrowing costs, it is clear from the PCE data that domestic demand is going through a rather warm period. This, in turn, raises questions about how much longer the Fed can continue rate hikes to affect domestic demand. And the second data, which will be announced on August 25, may be more effective in shaping the expectations.
The U.S. economy is in an economic recession when gross domestic product (GDP), which was at a negative level of 1.6 percent in the first quarter of the year, contracted at a level of 0.5 percent, despite the expectation of a quarter-over-quarter increase in markets by 0.9 percent. During this period, GDP increased by 7.8 percent annually and was reported as 24.85 trillion dollars.
According to BEA, the GDP price index stood at 8.9 percent in the second quarter after 8.2 percent in the first quarter, while the personal consumption expenditures price index (PCE) increased by 7.1 percent. During this period, the Core PCE decreased to 4.4 percent from 5.2 percent in the previous quarter. In addition, against the backdrop of real disposable personal income, which fell by 6.6 percent, real consumer spending increased by 1.0 percent.
According to BEA, the decrease in real GDP was influenced by the decrease in private inventory investments, housing investments and federal government expenditures. On the other side, increases in personal consumption expenditures were partially balanced due to the exports.
The GDP report shows that in the world's largest economy, the impact of the war in Ukraine and the lockdowns in China is extremely limited. It is also extremely surprising that despite the fluctuation in commodity prices, we observed a decline in inventories.
At this point, we believe that the most drastic tightening move of the US Federal Reserve, which started in March with a 150 basis point increase in interest rates at the June and July meeting, is the main driver. However, despite the higher borrowing costs, it is clear from the PCE data that domestic demand is going through a rather warm period. This, in turn, raises questions about how much longer the Fed can continue rate hikes to affect domestic demand. And the second data, which will be announced on August 25, may be more effective in shaping the expectations.
