Atlanta Fed Predicts Negative Second-Quarter Growth, Indicating Recession Has Begun

Atlanta Fed Predicts Negative Second-Quarter Growth, Indicating Recession Has Begun
Customers at the fruit and vegetable section at a Sainsbury's supermarket in Walthamstow in London on Feb. 13, 2022. (Tolga Akmen/AFP via Getty Images)
Andrew Moran

The U.S. economy is expected to contract in the second quarter, the latest estimate from the Federal Reserve Bank of Atlanta shows.

The economy is expected to fall to a negative 1 percent annual rate in the April-to-June period, according to the Atlanta Fed Bank’s GDPNow model. That’s down from an 0.3 percent projection from earlier this week.

The regional central bank cited the latest economic data from the U.S. government. Second-quarter real personal consumption expenditures fell to 1.7 percent, down from 2.7 percent. Real gross private domestic investment growth tumbled to minus 13.2 percent, down from minus 8.1 percent.

“The nowcast of the contribution of the change in real net exports to second-quarter GDP growth increased from [minus] 0.11 percentage points to 0.35 percentage points,” the Atlanta Fed stated.

The next GDPNow update will be released on July 1. A recession is defined as two consecutive quarters of economic contraction.

The update comes one day after the final first-quarter gross domestic product (GDP) reading was revised lower to an annual rate of minus 1.6 percent, the first quarterly drop since 2020. GDP fell as consumer spending growth was adjusted lower to 1.8 percent, while private inventories tumbled by 0.3 percent. Imports surged at a better-than-expected rate of 18.9 percent, fixed investment growth held steady at 7.4 percent, and housing investment stayed at a tepid pace of 0.4 percent.

Ships wait to offload cargo in the Port of Long Beach, Calif., on Oct. 27, 2021. (John Fredricks/The Epoch Times)
Ships wait to offload cargo in the Port of Long Beach, Calif., on Oct. 27, 2021. (John Fredricks/The Epoch Times)

The odds of a recession within the next two years have increased since the last consumer price index (CPI) reading.

A recent June global market survey from Deutsche Bank found that 90 percent of respondents anticipate the next U.S. recession will take place by the end of 2023 or before, up from 78 percent in May. The same study revealed that 20 percent think a recession is poised to happen this year, up from 13 percent last month.

Speaking at a media webinar on June 30, Andrew Balls, Pimco’s global chief investment officer (CIO) for fixed income, noted that an economic downturn over the next 12 months is “probably more likely than not.”

“A recession is not the only important thing. You’re clearly going to see a significant growth slowdown,” he said. “The inflation profile in the short term is very important. Central banks are focused on inflation credibility.”

Nick Reece, portfolio manager at Merk Investments, echoed this sentiment.

“More important than the recession vs. soft landing outcome is that inflation does indeed come down,” he wrote in a research note.

Nancy Tengler, CIO and CEO at Laffer Tengler Investments, pointed to abysmal regional surveys for the manufacturing sector as areas of growth concerns.

“Important because they track the national manufacturing PMIs [purchasing managers’ indexes]. June’s manufacturing PMI will be out Friday,” she said in a June 30 note. “The PMIs are rolling over as we have written for months now. Earnings—which are highly correlated to PMIs—have yet to be revised down. We think that will be the theme of Q2 earnings: lowered guidance.”

The Fed Bank of Dallas’s Manufacturing Index plunged to minus 17.7 in June. The Philadelphia Fed Bank Manufacturing Index fell to minus 3.3, while the Kansas City Fed Manufacturing Production Index slipped below zero to a two-year low.

“Over 85 percent of firms reported delays in shipping and product availability as continued negative impacts on their business activity, with around half of firms not expecting any improvements in the next six months,” Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, said in a statement.

The Institute of Supply Management (ISM) manufacturing PMI is expected to drop to 54.9 in June. If accurate, this would be down from the 56.1 reading in May.

Despite escalating recession talk, Federal Reserve Chair Jerome Powell still believes that the economy is in “strong shape” and can avert a recession, although he said the task is getting tougher to achieve. He reiterated the statement he made in front of Congress: His main focus continues to be price stability.

“We will not allow a transition from a low inflation environment to a high inflation environment,” Powell said at the European Central Bank’s (ECB) annual policy forum in Sintra, Portugal, on June 29.

That said, he noted that the institution aims to raise rates without triggering a recession.

“We hope that growth will remain positive,” Powell said. “Overall, the U.S. economy is well-positioned to withstand tighter monetary policy.”

Powell and many of his colleagues on the Federal Open Market Committee (FOMC) have signaled that they'll raise interest rates by another 75 basis points at the July policy meeting. The central bank is also widely expected to pull the trigger on a 50-basis-point rate increase in September, according to CME FedWatch Tool.

The personal consumption expenditure (PCE) price index, the central bank’s preferred inflation gauge, remained at a multi-decade-high of 6.3 percent year-over-year. The core PCE price index, which removes the volatile food and energy sectors, eased to 4.7 percent.

The much-anticipated June CPI will be published on July 13.

Andrew Moran has been writing about business, economics, and finance for more than a decade. He is the author of "The War on Cash."
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