Real GDP declined at an annualized rate of 0.9 percent in the second quarter versus a decline of 1.6 percent in the first quarter (see chart 1). Over the past four quarters, real GDP has increased by 1.6 percent.
Real final sales to private domestic buyers, a key measure of private domestic demand, showed greater resilience. It was unchanged in the second quarter following a 3.0 percent increase in the first quarter (see chart 1). Over the past four quarters, real final sales to private domestic buyers have risen 1.7 percent. The data in the current report is based on incomplete information and is likely to be revised in subsequent editions.
The declines were widespread in the second quarter. Among the components, total real consumer spending rose at an annualized rate of 1.0 percent, the slowest pace since the shutdown recession, and contributed a total of 0.7 percentage points to real GDP growth. Consumer services led the growth in total consumer spending, posting an annual rate of 4.1 percent, adding 1.78 percentage points to the overall growth. Expenditure on durable goods decreased at a pace of 2.6 percent, minus 0.22 percentage points, while spending on non-durable goods decreased at a pace of -5.5 percent, minus 0.85 percentage points (see the second and third graphs). In consumer services, growth was generally strong, led by food and accommodation services (13.5%), entertainment (7.4%), and other services (growth rate of 6.6%).
Business fixed investment declined at an annualized rate of 0.1 percent in the second quarter of 2022, minus 0.01 percentage points from final growth. Investment in intellectual property increased by 9.2 percent, adding 0.47 points of growth, while investment in business equipment decreased at a pace of -2.7 percent, subtracting 0.16 percentage points, and spending on business structures decreased by 11.8 percent, which is the fifth decline in a row, subtracting 0.32 percentage point of final growth.
Residential investment, or housing, declined at an annualized rate of 14.0 percent in the second quarter compared to an annual gain of 0.4 percent in the previous quarter. Subtract the decline in the second quarter by 0.71 percentage points (see second and third graphs).
Companies added to inventory at an annual rate of $81.6 billion (in real terms) in the second quarter versus a backlog of $188.5 billion in the second quarter. The slow buildup reduced growth in the second quarter by a very large 2.01 percentage point (see chart three). The inventory buildup helped increase the real nonfarm stock to real final sales ratio of goods and structures to 4.07 from 4.0 in the first quarter; The ratio bottomed at 3.75 in the second quarter of 2021. The latter result is still below the average of 4.3 in the 16 years to 2019, but indicates further progress towards a more favorable supply/demand balance (see Chart IV) .
Exports increased by 18.0 percent, while imports rose by 3.1 percent. Because imports are negative in the GDP calculation, increased imports are negative for GDP growth, subtracting 0.49 percentage points in the second quarter. The increase in exports added 1.92 percentage points. Net trade, as used in the GDP calculation, contributed 1.43 percentage points to overall growth. Government spending declined at an annual rate of 1.9 percent in the second quarter compared with a pace of decline of 2.9 percent in the first quarter, minus 0.33 percentage points of growth.
Consumer price metrics showed another rise in the second quarter. The personal consumption price index rose at an annual rate of 7.1 percent, matching the first quarter. A year ago, the index rose 6.5 percent. However, excluding the volatile food and energy categories, the core PCE index rose by 4.4 percent versus a 5.2 percent increase in the first quarter which is the slowest pace of rise since the first quarter of 2021 (see table five). A year ago, the core PCE index rose 4.8 percent.
Ongoing material shortages, labor constraints and logistical problems are continuing upward pressure on prices, although some progress has been made. Upward price pressures intensified the Fed’s policy tightening cycle (the federal funds target rate is now 2.25 percent to 2.50 percent after the second rise of 75 basis points in eight weeks and matching the peak rate from the last tightening cycle), raising the risk of a policy error. In addition, the fallout from the Russian invasion of Ukraine continues to affect capital and commodity markets, as well as global supply chains. Moreover, 2022 is the year of the Congressional elections. Bitterly high partisanship and a deeply divided population can lead to unrest as confidence in the election results is under constant attack. The contested results across the country could lead to additional economic turmoil and government paralysis, once again testing the continuity of democracy and the union itself. Caution is required.
Robert Hughes
Robert Hughes joined AIER in 2013 after more than 25 years researching financial and economic markets on Wall Street. Previously, Bob was Head of Global Equity Strategy for Brown Brothers Harriman, where he developed an equity investment strategy that combines top-down macro analysis with upward fundamentals.
Prior to BBH, Bob was Chief Equity Analyst at State Street Global Markets, Chief Economist at Prudential Equity Group and Chief Economist and Financial Markets Analyst at Citicorp Investment Services. Bob holds an MA in Economics from Fordham University and a BA in Business Administration from Lehigh University.
