U.S. Economic Activity Falters In June

Scott Anderson
Chief Economist
Bank of the West

The economic data releases for June continued to come in weaker than economists' forecasts. The Bloomberg Economic Surprise Index that tracks how daily economic releases are tracking compared to consensus economist estimates turned decidedly negative over the past 30 days.

U.S. Economy Is A Story Of Negative Economic Surprises

The regional manufacturing surveys for June released this week, The Dallas Fed Manufacturing Activity Index and Richmond Fed Manufacturing Index, both plunged further into negative territory at a pace usually only seen at the start of a downturn or recession. The national ISM Manufacturing Index itself, plunged today more than economist projected to 53 from 56.1 in May, led by declines in new orders and employment which moved into contraction territory. The overall ISM Manufacturing Index managed to remain in expansion territory, but fell to a two year low and no longer reflects a robust manufacturing expansion.

New Orders and Employment Fall Into Contraction

This drop in manufacturing surveys last month was joined by another steep drop in the Conference Board's Consumer Confidence Index for June to a level not seen since February of 2021, reinforcing and confirming the decline coming from the University of Michigan's Consumer Sentiment Index that hit a new record low in June.

Drop In Future Business Conditions Looks Recessionary

But the biggest negative surprises coming from the U.S. economic data this week was the huge downward revision in real consumer spending growth in the final release of the first quarter GDP Report and the Personal Income and Spending Report for May that showed a sizable downward revision in April personal spending and an outright decline in real personal spending for May. Usually the final GDP Report moves the estimate of real consumer spending by a tenth of a percentage point or two in one direction or another from the second GDP report release, but this time real consumer spending was revised down from a 3.1% annualized growth rate to a rather mediocre 1.8% annualized pace. Bottom line, consumer spending was not a robust as we thought over the first three months of the year. And if the personal spending reports for April and May are any indication, the pace of real consumer spending growth in the second quarter is likely to be even worse. Real durable goods spending declined 3.5% m-o-m in May. Real non-durable goods spending dropped 0.6% m-o-m in May and has been declining since February.

Durable and Nondurable Goods Spending Declines

The rapid deterioration of the manufacturing surveys in June and the latest hard data on consumer spending over the first 5 months of the year, in the midst of the fastest inflation in 41 years and widespread speculation of impending recession thrown in for good measure, is souring the U.S. economic outlook like two week old milk.

After making cuts to our GDP forecasts last week, we once again had to take a knife to our economic growth forecasts for the second quarter and the 2H of 2022. We now have real GDP growth of just 0.6% in the second quarter after a 1.6% annualized decline in Q1. In fact there is a good chance that second quarter GDP could come in negative depending on how the business inventory swing plays out. We expect a sizable drop in inventory growth in the second quarter that will chop off about 1.5 percentage points from Q2 GDP growth. The second half of 2022 doesn't look much better, especially if the Fed goes through with their threat to hike rates aggressively until year end. We think the risk of recession is now the highest it has been, and could happen as soon as this year, and we no longer expect any Fed rate hikes in 2023. Even so, still high consumer inflation next year could keep the Fed from being able to cut rates to aid the economy until 2024.

To learn more, check out this week's U.S. Outlook Report.


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