Real GDI Increased in the Quarter, Another Reason Economy Is Not in Recession

• There was a slight upward revision to real GDP in the second quarter, although it still declined. Real GDP has fallen for two straight quarters.
• Much of the contraction in the second quarter came from inventories. Demand remains solid.
• Corporate profits rose solidly in the second quarter, after declining in the first quarter.
• Real GDI, an alternative measure of the size of the economy, increased in both the first and second quarters. Real GDP in the first half of 2022 is likely to be revised higher when the BEA releases its annual revisions next month. The US economy is not currently in recession.
• Economic growth is slowing as the Federal Reserve raises interest rates to slow elevated inflation. The probability of near-term recession is high.

Real GDP declined 0.6% at an annual rate in the second quarter, according to the second estimate from the Bureau of Economic Analysis. This is an upward revision from a 0.9% decline in the advance estimate. Compared to the advance estimate, there were upward revisions to consumer spending, investment in inventories, and state and local government spending; these were somewhat offset by downward revisions to investment in housing, federal government spending, and exports. Imports were revised lower; lower imports increase GDP.

Inventories were a big drag on growth in the second quarter, subtracting 1.8 percentage points from annualized growth. Housing was also a drag with higher interest rates; residential investment subtracted 0.8 percentage point from growth. Business fixed investment was flat in the second quarter. Consumer spending growth was solid, adding 1.0 percentage point to growth, while trade added 1.4 percentage point to growth. Government was a slight negative, subtracting 0.3 percentage point.

With much of the contraction in real GDP coming from inventories, final sales of domestic product, which measures demand for U.S.-produced goods and services, increased a solid 1.3% annualized in the second quarter.

This was the second straight quarterly decline in real GDP; it fell 1.6% in the first quarter. On a year-over-year basis, real GDP was up 1.7% in the second quarter.

Corporate profits rose 6.1% (not annualized, not adjusted for inflation) in the second quarter, or $175 billion, after falling 2.2% in the first quarter. Both domestic profits and profits from abroad rose in the second quarter. There was a big increase in domestic profits for nonfinancial industries, up $174 billion, but domestic profits of financial corporations fell $24 billion over the quarter.

This report provided the first reading on real gross domestic income for the second quarter, an alternative measure of the size of the economy, looking at incomes going to households and firms from economic activity. Real GDI rose a solid 1.4% in the second quarter, following a 1.8% increase in the first quarter. The divergence between real GDP and real GDI in the first half of 2022 has been especially wide. The solid growth in real GDI over the past couple of quarters is another indication that the US economy was not in recession in the first half of the year, despite the contraction in real GDP.

The BEA will release its annual revisions to GDP next month. Given the big divergence between GDP and GDI, there is likely to be a substantial upward revision to GDP in the first half of 2022.

Real GDP was revised modestly higher in the second quarter but still declined. There has been a big disconnect between real GDP and other economic measures in the first half of 2022. Real GDP fell, but employment growth was very strong, real GDI was up solidly, and industrial production increased. Revisions next month will likely show that GDP was not nearly as soft in the first half of the year as initially reported and may even show an increase in real GDP in the first half of the year.

That being said, economic growth is slowing and recession risks are elevated. With inflation near its strongest levels in 40 years, the Federal Reserve is aggressively raising interest rates to cool off economic growth; the housing market has already started to cool in response. PNC’s baseline forecast is for much weaker growth over the next couple of years and slowing inflation, but no recession. But the probability of recession is around 45%.

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