Nicholas A. Juhle, CFA®

Chief Investment Officer

GDP Contracts Again; Looking Under the Hood

This morning, the Bureau of Economic Analysis delivered an advance estimate of second quarter GDP growth.  The report showed that real GDP decreased at an annual rate of 0.9% in the second quarter following a decrease of 1.6% in the first quarter.  In yesterday’s Fed update, we cautioned that a negative GDP print could trigger headlines declaring a recession, noting that it would be difficult to characterize current economic conditions as recessionary.

Many maintain that two consecutive quarters of real GDP declines constitute a recession, but that is neither the official definition nor the way economists evaluate the state of the business cycle.  The National Bureau of Economic Research (NBER; the official recession scorekeeper) defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

This definition allows for more subjectivity.  The decline must be sizeable, broad-based and protracted to qualify.  In practice, certain portions of the NBER’s definition can outweigh other portions.  In 2020, the severity and breadth of economic contraction were enough for the NBER to call a recession even though it was decidedly brief.

There can be a recession without two consecutive quarters of real GDP contraction and there can be two consecutive quarters of real GDP contraction without a recession.  The latter scenario is especially relevant today.  The table below highlights contributions to total GDP growth over the last six quarters.  The most important categories for the economy, consumer spending and fixed investment, are enumerated at the top, while less meaningful categories, inventories, exports and government spending, are detailed at the bottom.

In the second quarter, consumer spending decelerated, but grew 0.7% while fixed investment spending (think housing market) declined at a rate of 0.7% netting no real contribution to total GDP growth.  Meanwhile, declines in private inventories and government spending drove the overall change.  Similar dynamics were at play in the first quarter.

Definitions aside, risks are elevated and we will experience a recession at some point, just as we have every 4-5 years since World War II.   Historical returns were not achieved in the absence of geopolitical events, natural disasters, health crises, presidential elections, legislation, regulation, deregulation, recessions etc.

If we look out over the next ten or twenty years, we can virtually guarantee we will encounter these types of events again.  We won’t always know what is coming, but if we know that certain types of events are pretty much guaranteed to happen at some point, and we construct client portfolios with that knowledge in mind, then the only way we can compromise achievement of our clients financial goals is if we lose discipline when it matters most.

Despite an ever-changing landscape, our disciplined approach and long-term orientation serve us well as we endeavor to create comprehensive investment solutions that help our clients reach their financial goals.  Please contact any member of our team if you have questions.