The headlines for the Q2 US GDP report showed a downgrade to real GDP from 2.5% to 2% SAAR. This is the traditional threshold for ‘stall speed’ – a period of slow growth which typically precedes recession. The best reference on this sort of analysis is this paper by the FRB’s Jeremy Nalewaik.
The second GDP report, however, gives us a lot more interesting information than the first release. In particular, the second cut gives us income estimates – which are considered to be a superior real time indicator of how the economy is travelling.
The short summary is that the US is travelling ‘poorly’: US real GDI was +0.4% SAAR (~0.1%q/q), following +0.3% SAAR in Q2. This pulled the YoY pace of growth down to 1.1%. Given this starting position, the risk of contraction is quite elevated.
The two papers I linked to above are both by the FRB’s Jeremy Nalewaik, so it should come as no surprise that the concepts can be linked: a sustained period of sub 2% real GDI growth is a better leading indicator of recession than a sustained period of sub 2% real GDP growth.
By itself, the inability of the US economy to grow at a pace that would reduce the unemployment rate was a concern. Given that the incomes data is weaker than the production data, and that year ahead is likely to bring a European credit crunch and recession (possibly sudden fiscal tightening) it is easy to imagine a mild US recession.
The only reason to doubt it is that the normally cyclical sectors are already so beaten up.