With a second consecutive quarter of negative growth, the question of a US recession is becoming a hotly debated topic. But, in our view, it would be hasty to declare defeat. Indeed, if you look more closely, you see a much more nuanced - and resilient - economic landscape than the official GDP figure indicates.
Beyond the technical definition of a recession, with two quarters of decline, an official US recession must be declared by the National Bureau of Economic Research (NBER), which often happens several quarters later. Today, we believe that the US is not in recession. Already, economic figures are frequently revised, so we could see the second quarter figures revised into positive territory. In addition, the first quarter GDP was impacted by very strong demand which drove up imports. The second quarter, on the other hand, was affected by large movements in inventories and demand for goods, while demand for services rose sharply. Government spending also fell in Q2, but is expected to pick up with new tax packages expected to be approved by Congress.
Yes, underlying demand is gradually slowing, especially among the lowest paid households who are most affected by inflation, but it is not as weak as some headlines suggest. Spending remains strong, particularly among high-end consumers. Leisure spending is 15% higher than in Q2 2019, exceeding pre-pandemic levels. In addition, the strength and resilience of the US labour market may prevent the NBER from declaring a recession.
The biggest question is that of a future recession. It is too early to rule out this possibility for 2022 or early 2023, but we remain confident for now. The Federal Reserve is also seen as coming to the end of its most aggressive phase of monetary tightening, which should ease investor sentiment in the coming months.
This expectation should be supported by the disinflationary signals that are starting to arrive. Indeed, commodities have fallen sharply from their peaks, businesses have excess inventories that they need to clear, used car and travel prices are falling and the housing market is starting to cool in the face of rising mortgage rates. More recently, the "prices paid" component of the ISM industrial index fell sharply in July, to its lowest level since August 2020, and the services price index also fell for the third consecutive month. All of this points to a decline in prices, albeit a gradual one.
The United States is also much less exposed to the energy crisis that threatens the European economy. The sword of Damocles of a Russian gas cut-off before winter does not hang over the Americans, who are independent for their energy needs. There is no risk of production stoppages or power cuts in sight.
Finally, one should never underestimate the American consumer. Even though the savings rate is back to normal, the level of excess savings is still very high and Americans still have a lot of unspent money from Covid.
With a sharp slowdown in China and a very likely recession in Europe, markets need the US economy to hold up and support the rest of the world and corporate earnings. A slowdown and negative reaction to the data remains likely, but it is certainly too early to say that the US economy has fallen into recession. For the time being, we are still leaning towards optimism.