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 two straight quarters of economic contraction, a common rule-of-thumb definition for recession, but forecasts vary widely. Roughly a third of economists said GDP declined, including Bank of America Corp. and Deutsche Bank AG. Estimates range from a 2.1% drop to a 2% advance in Bloomberg’s survey of economists.

In the US, a group of academics at the National Bureau of Economic Research makes the official recession call. They define a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months” and look at a variety of factors to make their determination.

What Are Recessions? Plus Thoughts on the Next One: QuickTake

Data released Wednesday prompted a few economists, including those at JPMorgan Chase & Co., to raise their second-quarter GDP forecasts. The merchandise trade deficit narrowed in June by more than expected and inventories at retailers and wholesalers both solidly increased. Core capital goods shipments also increased.

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.

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.

Read more: Walmart Sinks as Inventories, Thrifty Shoppers Hit Outlook

Still, Blerina Uruci, US economist at T. Rowe Price Group Inc., said she’s more optimistic about the second half of the year. The worst of inflation has likely passed, and if the labor market stays strong and gas prices don’t spike again, “we’re going to have a bit of a revival in consumer spending,” she said.

Investment

The clearest example by which Fed interest-rate hikes are impacting the economy is the housing market, something that should be highly visible in Thursday’s report. The coinciding surge in mortgage rates has stifled demand, pushing up inventory and leading some buyers to back out of existing deals.

Michael Feroli, chief US economist at JPMorgan Chase & Co., expects residential investment dropped an annualized 13.5% in the second quarter. If realized, that would be the sharpest decline since the beginning of the pandemic.

Meantime, the pace of business investment is expected to cool substantially. Part of the slowdown may reflect growing concerns about the economic outlook. A survey of purchasing managers by S&P Global found firms’ expectations for the future deteriorated in July to the lowest since 2020. Some of the softening reflects inflation in capital goods, Feroli said.

Inventories & Trade

A slower build in inventories compared to the first three months of the year is poised to be an enormous headwind to second-quarter growth. The Atlanta Fed’s GDPNow estimate shows the change in inventories subtracted 2.5 percentage points from the headline figure it pegs at minus 1.6%.

Inventories also weighed on first-quarter GDP but not nearly to the same extent.

Meantime, net exports are poised to add to growth for the first time in two years. The US trade deficit widened to the largest on record in March as imports surged. Since then, the gap has narrowed. Exports likely increased in the second quarter — after falling the first quarter — while imports climbed at a slower pace after surging in the prior period, Feroli said.