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Economy Statement by Benjamin Harris, Assistant Secretary for Economy Policy,


Economic data were mixed in the second quarter of 2022.  Real GDP contracted mildly for a second consecutive quarter, but employment continued to rise.  Firms added an average of 375,000 jobs per month and the unemployment rate remained near a half-century low.  Surging energy and food prices—due in part to Russia’s invasion of Ukraine—pushed up headline inflation to new highs, though core inflation remained elevated as well.  At the same time, housing data suggested the start of a market correction as high house prices and rising interest rates constrained demand for new and existing homes.

As in the first quarter, the economic environment was framed by the emergence of new coronavirus variants, tightening monetary policy, negative impacts from Russia’s invasion of Ukraine, and supply-demand mismatches.  Production was constrained by physical disruption of transportation and other aspects of supply chains, including COVID-related lockdowns, and continued shortages of production materials, such as semiconductors for motor vehicles.  Inflation at the headline and core levels has continued to climb this year, but at the margins, there is some easing of prices in some markets: the federal government has taken a variety of steps to reduce gasoline prices and tightness in grain markets may be loosening.

GDP Growth

According to the advance estimate of second quarter GDP (released Thursday, July 28), real GDP declined by 0.9 percent at an annual rate, following a 1.6 percent drop in the first quarter.   The pullback in economic activity in the second quarter primarily reflected a significantly slower build-up of private inventories, in addition to less residential investment and government spending.  By contrast, net exports and personal consumption expenditures (PCE) both contributed positively to GDP growth.  Despite two consecutive quarters of modest contraction, real GDP was still up 1.6 percent over the last four quarters.

Real private domestic final purchases (PDFP)—the sum of personal consumption, business fixed investment, and residential investment—was flat in the second quarter, after rising 3.0 percent at an annual rate in the first quarter.  This measure, which excludes final public and international demand for goods and services, as well as the change in private inventories, is typically a better indicator of the private sector’s capacity to generate self-sustaining growth.  A flat reading for PDFP indicates a slowing in underlying growth.

Real PCE—the largest component of PDFP and roughly two-thirds of real GDP—rose by 1.0 percent in the second quarter on an annualized basis, slowing from a 1.8 percent increase in the first quarter.  Consumption reflected the rotation from goods to services as households slowly returned to pre-pandemic patterns of spending.  Consumption of services rose 4.1 percent due to recovering demand for food services and accommodations, recreation, transportation, and health care.  Meanwhile, consumption of goods fell by 4.4 percent as spending on both durable and nondurable goods pulled back from elevated levels.  Household expenditures on durable goods were 2.6 percent lower, while spending on nondurables dropped 5.5 percent.  The latter partly reflected higher prices for gasoline as well as for food and beverages consumed at home.  Although households are returning to pre-pandemic styles of consumption, the rotation remains incomplete.  The composition of total PCE remains weighted more heavily toward goods than services: as of the second quarter of 2022, the share of goods in total PCE was 4 percentage points higher than the pre-pandemic (2015-2019) average.

Business fixed investment (BFI) declined 0.1 percent in the second quarter, after surging by 10.0 percent at an annual rate in the first quarter.  This was the first decline in BFI after seven consecutive quarterly advances.  Investment in structures posed a much larger drag on growth, dropping 11.7 percent in the latest quarter, after slipping 0.9 percent in the first quarter.   Equipment investment decreased 2.7 percent in the second quarter, following a 14.1 percent jump in the previous quarter.  Investment in intellectual property products, which was the sole positive contributor to business investment spending, rose 9.2 percent at an annual rate in the second quarter, slowing modestly from a 11.2 percent advance in the first quarter.

Real residential investment—the third and final component of PDFP—fell by 14.0 percent at an annual rate in the second quarter, following a 0.4 percent increase in the previous quarter.  Lower investment was broad-based.  Single-family structures spending fell 4.2 percent while multi-family structures investment was down 5.6…



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