Recession semantics aside, the new GDP numbers are bad

There isn't much left to say in the semantic debate over whether the U.S.'s two straight quarters of GDP contraction amounts to a recession.

The big picture: The committee of economists that arbitrates these things probably won't see it that way, but two quarters of contraction is indeed a common rule of thumb for recession. You can decide for yourself which definition you embrace. (See more here and here).

• More important than the precise definition of "recession" is what the new data tells us about how the economy is evolving. On that front, the details of the GDP report were pretty gory.

Why it matters: Consumers aren't ramping up their spending like they were, businesses are taking a pause on investment, and housing is slumping. That is a recipe for a serious downturn in the second half of the year, whatever terminology we use.

• While the headline GDP number for Q2 showed a 0.9% rate of contraction (less bad than Q1) the underlying details are worse in terms of what they imply for the future.

State of play: The biggest drag was a decline in inventories, but that is also the easiest to ignore, as those numbers swing around in ways that don't tend to say much about the future.

• If you focus on the indicators of underlying domestic demand for signals of where things are going, there is softening across the board.
• Final sales to private domestic purchasers flatlined (actually it was -0.02%). From 2010 to 2019 — years we think of as steady expansion — that number averaged an annualized 2.8% a quarter and never fell below 0.77%.

Details: Business spending on structures and equipment fell, subtracting a combined 0.48 percentage points from overall GDP growth. That was their steepest decline since the pandemic's onset more than two years ago.

• Meanwhile, residential investment subtracted 0.71 percentage points, also falling the most since the start of the pandemic.

Notably, these drops in business investment and housing cover the April to June period. But many signs point to the distress in those sectors spreading further heading into the second half of the year. The turmoil in those segments of the economy may have only just begun.

Meanwhile, personal consumption spending continued to grow in Q2 but only contributed 0.7 percentage points to GDP growth, the lowest since the onset of the pandemic.

• Consumers continue to power the economy forward. Yet thanks to inflation, they're not rushing to spend at high enough rates to keep the overall economy afloat.

The bottom line: Call it a recession, a "vibecession", a soft patch — whatever you like. But the underlying momentum in the economy clearly faded through the spring months and may get worse.