Peter Orazem
Peter Orazem

Iowa’s gross domestic product declined 0.8% in the second quarter of the year, the third consecutive decline and a sign that one economist said could indicate “the U.S. economy is headed for a recession if it’s not already there.”

According to the U.S. commerce department’s Bureau of Economic Analysis, Iowa’s GDP declined slightly less in the second quarter than all of its neighboring states, but was slightly more than the U.S., which saw a 0,6% decline in GDP.

The GDP measures the monetary value of finished goods and services in each state and the country. In quarterly reports, the GDP is expressed in annualized amounts. For the second quarter, the monetary value of Iowa’s GDP totaled about $1.7 billion.

Sectors that saw the strongest performance in the second quarter were agriculture; finance and insurance; health care; arts, entertainment and recreation; and accommodations and food service, which all saw positive GDP growth, according to the report issued on Sept. 30.

Construction, both durable good and nondurable goods manufacturing, and wholesale trade all saw negative GDP growth in the second quarter.

Peter Orazem, an economics professor at Iowa State University, said all indications are that the economy is heading toward recession, if it’s not already there.

He said Iowa’s lagging labor issues are a factor in its sluggish GDP performance. A decrease in labor productivity over the past several months is also a contributing factor, he said.

“That also bodes ill for inflation,” Orazem said. “What kept the inflation rate so low over so many years was in part an increase in labor productivity. Even while input prices were going up, we were able to hold back on labor costs because labor was becoming more productive … and that’s not been true during 2022. So on top of everything else we have a decline in labor productivity.”

Thomas Root, a professor of finance at Drake University, said two consecutive quarters of negative GDP growth is often the benchmark used for declaring an economy to be in a recession, but that can be misleading because consumer confidence, unemployment, corporate profits and business investments are also looked at to determine if economic activity is in widespread decline.

While three straight quarterly declines are worrisome, they “don’t show a deep decline in real GDP,” Root said. “The question then becomes what has happened in the economy since the end of the first quarter of 2022, and has it signaled a broader decline in growth that could be termed a recession?”

Root said growth in the labor market is often used to counter concerns of recession, and nonfarm employment has been growing since March. But he said that growth, about 3,200 workers each month, can also be misleading.

The state’s low unemployment rate of 2.6% in August is in part a result of a shortage of workers as a result of those who have left the workforce, with the state’s workforce participation rate remaining below pre-pandemic levels, he said.

Root said there is concern of a future, broader economic slowdown as the Federal Reserve continues to increase interest rates in an effort to lower inflation.

“It is likely that the Federal Reserve will continue its interest rate hikes, adding to the recession fears over the next six months and potentially tipping the broader economy to the point of recession,” he said.

Despite the decline in GDP, Iowa’s economy is performing well since the second quarter of 2019, Orazem said.

“There are some sectors that are doing reasonably well, but our employment isn’t reflecting that,” he said. “For example, finance and insurance is up 17.5% in real terms, relative to 6.2% nationally. But employment is actually down, so it’s hard to figure out precisely what is going on in that sector.”

On the other hand, retail trade is up since 2019, even though GDP in retail trade is going down, “so some of these things are really mixed messages,” Orazem said.

“But manufacturing seems to be one of the bright spots, very much outpacing the U.S. going back to the second quarter of 2019,” he said.

Orazem said Iowa remains behind growth nationally dating back to 2019.

“I think in Iowa it’s still that labor market and we’ve been relatively slow rebounding in terms of labor supply. That’s holding back the Iowa recovery,” he said.

Some states that saw positive growth in GDP, such as Texas and Florida, have increased their labor supply since the pre-pandemic period, Orazem said.

He cited a decline in immigrants entering the workforce, and said older workers who left the workforce over the past two years aren’t likely to return — factors that will continue to hamper Iowa’s recovery.

According to the Iowa Business Council’s Third-Quarter Economic Update, Iowa’s current labor market remains about 40,000 people below pre-pandemic levels.

“That relative, slow rebound in GDP in Iowa relative to the rest of the U.S., you have to place that on the labor market,” Orazem said. “We still have a lot of unfilled vacancies in Iowa, and relative to other states surrounding us, we’ve had much, much slower increases in labor supply. So I think that’s hurting us, and it’s hard to see where we’re going to get that missing labor back.”