Is the U.S. in Recession?

Executive Summary

On Wednesday, July 30, the Bureau of Economic Analysis (BEA) will release the advance estimate of second-quarter GDP growth. After falling 0.5%, annualized, in the first quarter (see first graph), many are expecting a rebound in real growth to about 2-3% in Q2. One can see in the second graph where real GDP growth has been below the long-term trend since the Great Recession in 2008-2009. Often large government debt drags down growth. Another measure of the overall economy is the Chicago Fed National Activity Index, which is shown below in the third chart. All categories were negative, albeit two were increases from the previous month. And finally, orders for durable goods (higher priced and longer lasting goods) fell 9.3% in June (see last graph). Remember the July 30th GDP release is an advanced estimate – with many subsequent revisions. Time will tell whether the U.S. is in recession or not. 

For further analysis, continue to read The Details below for more information.

“The debt is like a crazy aunt we keep down in the basement. All the neighbors know she’s there, but nobody wants to talk about her.”
–Ross Perot

The Details

On Wednesday, July 30, the Bureau of Economic Analysis (BEA) will release the advance estimate of second-quarter GDP growth. After falling 0.5% on an annualized basis in the first quarter, many are expecting real growth to rebound to about 2-3% in Q2. The decline in the first quarter is attributed to a jump in imports. Many believe this occurred in an attempt to get ahead of the new tariffs.

Notice in the graph below from VettaFi that real growth has fallen below the long-term trend and remained there since the Great Recession of 2008-2009. I have written before about studies that show how high levels of government debt-to-GDP reduce future growth. Since the Great Recession, Federal debt has skyrocketed.

To examine the current state of the economy, one can look at the Chicago Fed National Activity Index (CFNAI). This index is derived from data from 85 economic indicators broken down into the four main categories that comprise GDP: 1) Production and Income; 2) Sales, orders & Inventory; 3) Personal Consumption & Housing; and 4) Employment, Unemployment & Hours. Readings for the month of June are shown in the chart below from VettaFi. Notice that although two of the indicators rose in June, the overall reading was negative for all four categories.

The graph below illustrates the three-month moving average of the CFNAI. The linear regression is shown in the downward trending green line. This too is consistent with the growth in Federal debt. The current reading is near levels at the start of the past eight recessions.

Durable goods are items that are expected to last longer, typically at least three years. These are usually higher-priced goods. New orders for durable goods are an effective indicator of consumer strength. Notice in the graph below, in June orders for durable goods fell 9.3%, the largest monthly decline since 2020. Also, orders for new manufactured durable goods are down two of the last three months.

If the advance estimate of second quarter GDP growth comes in as economists expect, around 2%, this would result in many concluding the U.S. is conclusively not in a recession, since there was not two consecutive quarters of negative GDP growth. The two-quarter rule of thumb is not the official factor in determining the start of a recession. It is important to remember, the GDP growth numbers are revised multiple times. Will the second quarter advanced estimate come in negative? Will it subsequently be revised downward? Only time will tell. And, I always say, the numbers are only as good as the data behind them.

The S&P 500 Index closed at 6,389, up 1.5% for the week. The yield on the 10-year Treasury Note fell to 4.39%. Oil prices decreased to $65 per barrel, and the national average price of gasoline according to AAA remained $3.14 per gallon.