US economy shrinks for second quarter, raising fears of recession

Washington — The US economy shrank for the second straight quarter from April to June, contracting at a 0.9% annual pace and raising fears that the nation could be approaching a recession.

The Commerce Department on Thursday reported a fall in GDP – the economy’s biggest gauge – after a 1.6% annual decline from January to March. Successive quarters of falling GDP is an unofficial, though not definitive, indicator of a recession.

Last quarter’s GDP report pointed to weakness in the economy. Consumer spending slowed as Americans bought fewer goods. Business investment fell. Inventory declined as businesses slowed to recharge their shelves, reducing GDP by 2 percentage points.

Higher lending rates, a result of a series of Federal Reserve rate hikes, stymied home construction, which shrank at a 14% annual rate. government spending also fell

The report comes at a critical time. Consumers and businesses are struggling under the burden of penalizing inflation and high credit costs. On Wednesday, the Fed raised its benchmark rate by three-quarters of a point for the second time in a row in its push to conquer the worst inflation outbreak in four decades.

The Fed is hoping to achieve a notoriously difficult “soft landing”: an economic downturn that manages to rocket prices without triggering a recession.

In addition to the United States, the global economy is also grappling with high inflation and weak growth, especially after soaring energy and food prices following Russia’s invasion of Ukraine. Europe, heavily dependent on Russian natural gas, is particularly vulnerable to recession.

In the United States, rising inflation and fear of recession have eroded consumer confidence and raised concerns about the economy, sending disappointingly mixed signals. And with November’s midterm elections looming, Americans’ discontent has eroded President Joe Biden’s public approval ratings and could increase the likelihood that Democrats will lose control of the House and Senate.

Fed Chair Jerome Powell and several economists have said the economy looks somewhat weak, suspecting it is in recession. Many of them, in particular, point to a still-strong labor market, with 11 million job openings and an unusually low 3.6% unemployment rate, to suggest that a recession, if any, will occur. So not here yet.

“The back-to-back contraction of GDP will fuel the debate as to whether the US is in recession or heading into recession soon,” said Sal Gutierri, senior economist at BMO Capital Markets. “The fact that the economy generated 2.7 million. Payrolls in the first half of the year would seem to argue against calling for an official recession for now.”

Still, Guatieri said, “the economy has rapidly lost steam due to four decades of high inflation, rapidly rising borrowing costs and a general tightening of financial conditions.”

Meanwhile, Congress is moving toward approving action to fight inflation under a deal announced Wednesday by Senate Majority Leader Chuck Schumer and West Virginia Democrat Sen. Joe Manchin. Among other things, the measure would allow Medicare to negotiate drug prices with drug companies, and the new revenue would be used to lower costs for seniors on drugs.

In the wake of Thursday’s second straight negative GDP report, Biden played down the news, pointing to consistently low unemployment and strong hiring.

In a statement, the president said, “After last year’s historic economic growth – and regaining all the private sector jobs lost during the pandemic crisis – it is no surprise that the economy is slowing as the Federal The reserve serves to reduce inflation.” “But while we are facing historic global challenges, we are still on the right track and we will come through this transition stronger and more secure.”

The first of three estimates of the government’s GDP for the April-June quarter is much weaker than the economy’s 5.7 per cent growth achieved last year. It was the fastest calendar-year expansion since 1984, showing how strongly the economy bounced back from the brief but brutal pandemic recession of 2020.

But since then, the combination of rising prices and higher borrowing costs has taken a toll. The Labor Department’s Consumer Price Index rose 9.1% in June from a year earlier, a pace not matched since 1981. And despite widespread wage increases, prices are rising faster than wages. In June, average hourly earnings, after adjusting for inflation, declined by 3.6% from a year earlier, the 15th consecutive year-on-year decline.

Americans are still spending, though at a much slower pace. Thursday’s report showed consumer spending grew at a 1% annual pace from April to June, up from 1.8% in the first quarter and 2.5% in the last three months of 2021.

Spending on goods such as appliances and furniture, which rose as Americans sheltered at home at the start of the pandemic, dropped at a 4.4% annual rate last quarter. But spending on services, such as airline trips and dinner out, grew at 4.1%, indicating that millions of consumers are venturing into more.

The economy actually grew at a 7.8% annual pace in the April-June quarter, before accounting for rising prices. But inflation wiped out that gain and then produced some more negative GDP numbers.

Against that background, Americans are losing confidence. Six months from now, their assessment of economic conditions fell to their lowest level since 2013, according to the Conference Board, a research group.

Fed hikes have already driven higher rates on credit cards and auto loans and more than doubled the average rate on 30-year term mortgages to 5.5 in the past year. Home sales, which are particularly sensitive to changes in interest rates, have fallen.

Even as the economy recorded negative GDP for the second consecutive quarter, many economists do not consider it to constitute a recession. The definition of recession that is most widely accepted is set by the National Bureau of Economic Research, a group of economists whose Business Cycle Dating Committee defines a recession as “a significant drop in economic activity which The economy is spread out and lasts longer than a few months.”

The committee assesses a number of factors before publicly declaring the death of economic expansion and the birth of a recession – and it often does very well after the fact.

“If we are not in a recession yet, we soon will be,” said Joshua Shapiro, chief US economist at economic consulting firm Maria Fiorini Ramirez Inc. For a soft landing or any other kind of happy ending.”

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