But Gross Domestic Income Up; Profits Fell

• Real GDP was revised slightly lower in the first quarter, to a 1.5% decline, from the initially reported 1.4% decline.
• Real gross domestic income, another measure of economic activity, rose in the first quarter.
• There was a small decline in corporate profits in the first quarter.
• The US economy is not in recession and will not be in recession in 2022.
• PNC’s baseline outlook is for slower economic growth in 2023 and 2024 as the Federal Reserve raises interest rates in an effort to slow inflation, but not a recession. However, the risk of recession over the next couple of years is elevated.

There was a small downward revision to real GDP in the first quarter of 2022, according to the second estimate from the Bureau of Economic Analysis. Real GDP contracted 1.5% at an annual rate in the first quarter, revised from a 1.4% contraction in the advance estimate. Compared to the advance estimate, there were downward revisions to investment in housing and in inventories, somewhat offset by upward revisions to consumer spending and exports. Imports were revised higher; higher imports reduce GDP. The contraction in the first quarter was the first since the second quarter of 2020, when the pandemic hit the US economy.

Real GDP in the first quarter was up a good 3.5% from one year earlier.

While real GDP contracted in the first quarter another measures of economic activity, real gross domestic income, increased by a solid 2.1% annualized in the first quarter. Real gross domestic income is the income going to households and businesses from economic activity, adjusted for inflation.

Corporate profits fell 2.8% (unannualized) in the first quarter of 2022, to $2.87 trillion at a seasonally-adjusted annualized rate. This was the first contraction in corporate profits since the fourth quarter of 2020. The decline in profits was broad-based; profits fell in both financial and non-financial domestic industries, and profits from international operations also fell.

There has been a lot of talk about recession, but the solid increase in real gross domestic income in the first quarter is further proof that the US economy is expanding in the first half of 2022. The decline in real GDP in the first quarter was primarily due to a larger trade deficit, reduced investment in inventories, and a drop in government spending. Underlying demand in the first quarter was very strong, with gains in consumer spending, business fixed investment, and investment in housing. Real GDP growth should bounce back in the second quarter, to around 4% at an annualized rate.

The National Bureau of Economic Research, which dates recessions and expansions in the US, defines recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” The NBER looks at a wide variety of indictors, not just GDP, including real personal income (excluding government transfer payments), employment, retail and wholesale sales, and industrial production.

Looking at all of these measures the US economy is expanding in the spring and is expected to remain in expansion in the near term. In particular, the labor market is in excellent shape. Job growth has averaged more than 500,000 per month in 2022, well above the pre-pandemic pace. The unemployment rate is 3.6%, just barely above the 3.5% rate before the pandemic and near the lowest unemployment rate in decades. Given the strong job market and solid consumer and business demand, the risk of recession in 2022 is low.

But conditions are dicier for 2023 and 2024. Inflation is well above the Federal Reserve’s 2% objective, and the central banks is raising interest rates to cool off growth and slow inflation. The concern is that the Fed could raise rates so much that higher borrowing costs cause a recession next year or the year after that.

PNC’s baseline outlook is that the Fed is able to slow inflation over the next couple of years without pushing the economy into recession, although growth will slow. But the risk of recession in 2023 or 2024 is elevated, at around 40%, and even if the Fed manages to avoid a recession, the next couple of years will be bumpy ones for the economy. The Russian invasion of Ukraine has made the Fed’s job even more difficult, weighing on growth while also boosting inflation.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.