- Real GDP declined again in the second quarter but does not necessarily mean the U.S. is in recession.
- Consumer spending growth accelerated while jobless claims stayed low.
- Consumer sentiment metrics were mixed in July.
Real GDP declined again in the second quarter, as falling inventory accumulation and lower residential construction spending decreased private investment. Even so, consumer spending did grow over the first quarter. We have now seen two negative quarters in a row on real GDP, but the technical declines do not mean the U.S. is in a recession.
Consumer spending growth accelerated in June, and even with inflation factored in, real spending increased slightly. Spending growth was supported by stable and strong income growth and a declining savings rate.
New and pending home sales declined in June. Total home sales were down in June and down 15% from a year ago.
Jobless claims remain low. Both the seasonally adjusted and non-seasonally adjusted jobless claims fell the week ending July 23. The nonseasonal number remains lower than before the pandemic began.
Consumer sentiment metrics were mixed in July as consumer confidence declined, but consumer sentiment increased. Sentiment is more correlated to inflation and the stock market. Falling gas prices and improving stock values likely helped lift sentiment from a record low in June.
GDP declines: The first estimate of second-quarter real GDP measured a decline of 0.9% annualized, which followed the 1.6% decline in the first quarter. Personal consumption decelerated to growth of 1.0% from 1.8% in the prior quarter. Spending on goods declined 4.4%, while spending on services accelerated to growth of 4.1%.
A sharp decline in inventory accumulation primarily caused the decline in GDP, but government spending also declined but at a slower pace compared to the prior quarter. Gross private investment also declined 13.5% from declining inventories and residential construction. With the decline in Q2, real GDP was up 1.6% from a year ago.
Consumer spending grows: Consumer spending growth accelerated in June and was more substantial than expected, with nominal growth of 1.1% from an upwardly revised increase of 0.3% in May.
Personal income growth was stable and strong at 0.6%. Employee compensation growth decelerated to 0.4% in June, and government transfer payments were unchanged as unemployment benefit payments increased for the first time in 15 months. Proprietors’ income growth accelerated to 1.4%.
Spending on durable goods increased 1.6% in June, spending on nondurable goods increased 1.7%, and spending on services increased 0.8%. Spending on motor vehicles and parts increased 1.5% following a 5.2% decline in May.
The personal savings rate declined to 5.1%, the lowest level in nearly 13 years. The Personal Consumption Expenditure Index, the key gauge of inflation that the Fed follows, increased 1.0% in June, an increase from the 0.6% increase in May and was larger than the 0.9% consensus estimate.
According to the Personal Consumption Expenditures Index, overall price inflation accelerated to 6.8% in June compared with a year ago, while the core inflation rate increased to 4.8% from 4.7% in May. Factoring in inflation, real spending increased by 0.1% in June. Despite inflation accelerating to a peak, consumers did not pull back.
Home sales fall: New home sales, which are based on new contracts signed on newly constructed homes, declined more than expected in June, and the May increase was revised down. New home sales at an annualized pace of 590,000 were down 17.4% from a year ago. Compared to June 2019, new home sales are down 7.0%.
New home inventory increased 2.2% from May and was up 32.1% from a year ago. New home supply increased to 9.3 months, which is about 50% higher than what is considered normal. In June, 26% of the new homes sold were on homes not yet started, while 43% were under construction, and 26% were completed units.
With the decline in both new and existing home sales in June, total home sales were down 5.7% for the month and down 14.6% from a year ago. Pending home sales, which are new contracts signed on existing homes, declined more than expected, with an 8.6% drop in June from May, when a decline of 1% had been expected. With the decline, pending sales were down 20% from last year.
Jobless claims low: Seasonally adjusted initial jobless claims declined by 5,000 to 256,000 for the week ending July 23. Non-seasonally adjusted claims fell by 42,000. Both measures have increased over the last eight weeks, but the nonseasonal number remains lower than at the beginning of 2020 before the pandemic began.
Continuing claims, which represent people who previously filed and remain on traditional unemployment compensation, declined by 25,000 from the week earlier, bringing the total down to 1.36 million as of the week ending July 16. That level of continuing claims was 404,000 lower than before the pandemic.
The broadest measure of continuing claims increased by 123,000 to 1.48 million in the latest data, which lags the traditional number and is not seasonally adjusted. That total measure is up 162,000 over the last four weeks but is 626,000 lower than the pre-pandemic level.
Consumer sentiment mixed: Consumer Confidence, according to the Conference Board, declined 2.7% in July when a smaller decline had been expected, and the June index was also revised down. Most of the index decline was driven by a 4.0% decline in the future. Plans to purchase a vehicle in the next six months declined to the lowest level so far this year and were down substantially from a year ago.
The confidence index has not declined as much as the sentiment index from the University of Michigan, and that series improved in July. The Michigan index increased 3% from a record low in June as it is much more sensitive to inflationary pressures and stock market change.
Similarly, the Morning Consult daily index has increased 2.5% so far in July as gas prices are down 15% from the peak in June.
Jonathan Smoke is chief economist at Cox Automotive.