The US economy may have eked out modest growth in the second quarter to skirt a so-called technical recession, yet at a pace tepid enough to feed concerns of an eventual downturn.

Economists expect gross domestic product grew an annualized 0.4% in the April-June period, which on the surface would be an improvement after the 1.6% drop in the first quarter. However, the breakdown of second-quarter GDP may illustrate a more concerning softening of demand.

Weak First Half

US 2Q GDP seen growing at tepid pace after declining in prior quarter

Source: Bureau of Economic Analysis, Bloomberg

The first-quarter decline largely stemmed from a surge in imports and a more moderate pace of consumption. While a narrowing of the trade deficit in the second quarter likely added to GDP, consumer spending probably decelerated further.

Walmart Inc. on Monday announced a cut in its profit outlook, raising concerns about the wherewithal of consumers to sustain discretionary spending, especially for big-ticket items. The retail heavyweight’s warning follows a similar move last month by Target Corp. as companies contend with a buildup in stockpiles of unwanted merchandise.

Cooler business investment, a weaker housing market and a slower pace of inventory growth are also seen taking a bite out of second-quarter GDP.

“One thing that we’re all watching is how swiftly underlying activity is slowing down,” said Andrew Hollenhorst, chief US economist at Citigroup Inc. “Economists can debate what a recession is, but at the end of the day, if businesses and individuals believe there is a recession that’s how they’ll behave.”

The economy may grow just enough to avoid a so-called technical recession — defined as two straight quarters of economic contraction — but economists’ forecasts vary widely. Roughly a third of them said GDP declined, according to the Bloomberg survey in which estimates range from a 2.1% drop to a 2% advance.

Even if Thursday’s report shows GDP increased, fears are mounting that decades-high inflation and a Federal Reserve determined to curb it will ultimately send the economy into a recession. The Fed has embarked on the most aggressive tightening campaign since the 1980s and is expected to boost interest rates by yet another 75 basis points later on Wednesday.

Here’s what to watch in the GDP report:

Consumer Spending

Consumer spending, the main engine of the US economy, will be the most important part of the report for many. Economists project that outlays decelerated further in the second quarter to an annualized rate of 1.2%, the weakest pace of the expansion. Inflation-adjusted spending declined in May from the prior month, and June outlays are expected to be flat when reported later this week.

Consumers Take a Step Back

US consumer spending forecast to soften to weakest pace of expansion

Source: Bureau of Economic Analysis, Bloomberg

Economists had long been forecasting a shift in purchases from goods to services, but it’s unclear to what extent services spending can hold firm in the face of surging prices.

Decades-high inflation has throttled purchasing power, with Americans facing high prices for necessities like gasoline and groceries. A recent Census Bureau survey showed four in 10 Americans say it’s somewhat or very difficult to cover usual household expenses, the highest share since the question was first asked in August 2020.