The US economy contracted for a second straight quarter from April to June, hitting a widely accepted rule of thumb for a recession, the Bureau of Economic Analysis reported Thursday.
Gross domestic product fell 0.9% at an annualized rate during the period, it said the advance estimate. That followed a 1.6% drop in the first quarter and was worse than the Dow Jones estimate of a 0.3% gain.
Officially, the National Bureau of Economic Research declares recessions and expansions, and probably won’t make a judgment on the period in question for months, if not longer.
But a second consecutive negative GDP reading fulfills a basic view of the prolonged recession, despite the unusual circumstances of the downturn and regardless of what the NBER decides. GDP is the broadest measure of the economy and encompasses the total level of goods and services produced during the period.
“We’re not in a recession, but it’s clear that the growth of the economy is slowing,” said Mark Zandi, chief economist at Moody’s Analytics. “The economy is close to stall speed, moving forward but just barely.”
Markets reacted little to the news, with shares slightly higher at the open. Government bond yields were mostly down, with the biggest declines at the shorter-duration end of the curve.
A separate report on Thursday showed layoffs remain high. Initial jobless claims rose to 256,000 in the week ended July 23, down 5,000 from last week’s upwardly revised level but above the Dow’s estimate of 249,000 Jones. according to the Department of Labor.
Broad-based slowdown
The decline stems from a wide range of factors, including declines in inventories, residential and nonresidential investment, and federal, state, and local government spending. Gross private domestic investment fell 13.5% over the three-month period
Consumer spending, as measured by personal consumption expenditures, rose just 1% over the period as inflation accelerated. Spending on services accelerated during the period by 4.1%, but this was offset by declines in non-durable goods of 5.5% and durable goods of 2.6%.
Inventories, which helped boost GDP in 2021, were a drag on growth in the second quarter, subtracting 2 percentage points from the total.
Inflation was the root of much of the economy’s problems. The The consumer price index rose 8.6% in the quarter, the fastest pace since the fourth quarter of 1981. This led to a 0.5% decline in personal income after taxes adjusted for inflation , while the personal savings rate was 5.2%, down from 5.6% the previous year. the first trimester.
“It really was scripted,” Zandi said of the report. “The only encouraging thing was that inventories played such a big role. They won’t play the same role in the next quarter. Hopefully consumers will continue to spend and businesses will continue to invest, and if they do, we’ll avoid a recession.”
The question of recession
After posting its strongest gain since 1984 last year, the US economy began to slow earlier this year due to a confluence of factors.
Supply chain problems, caused initially by an excessive demand for goods over services during the Covid pandemic, were at the heart of the problem. This only intensified when Russia invaded Ukraine in February and, more recently, when China enacted strict lockdown measures to combat an explosion of Covid cases.
The first-quarter numbers were also dampened by a widening trade imbalance and slowing inventories, which were responsible for much of the GDP gains in the second half of 2021.
Now, the economy is facing more fundamental problems.
Inflation began its sharp rise a year ago and then exploded in 2022, reaching its highest 12-month rise since 1981 in June. A slow response from policymakers initially has resulted in some of the largest interest rate hikes the United States has ever seen.
The Federal Reserve over the last four months has raised benchmark borrowing rates by 2.25 percentage points. Back-to-back increases of 0.75 percentage points in June and July mark the most aggressive two-month hikes since the Fed began using overnight rates as its main policy tool in the early 1990s.
“Recent economic data may not paint a consistent picture, but a second consecutive negative quarter of GDP provides further evidence that, at best, economic momentum continued its marked deceleration,” said Jim Baird, chief investment officer of Plante Moran Financial Advisors. “The Fed’s path to raising interest rates without pushing the economy into recession has become exceptionally narrow. There is a growing possibility that it has already closed.”
Still, Fed Chairman Jerome Powell said Wednesday that he expects the hikes to curb inflation, but that he doesn’t see the economy in recession.
In fact, most economists don’t expect the NBER to declare an official recession, despite consecutive quarters of negative growth. Rather, the feeling on Wall Street is that the economy could be headed for a recession later this year or in 2023, but it’s not in one now.
However, this may not be enough to change public perception. A Morning consultation/Political survey Earlier this month, he indicated that 65% of registered voters, including 78% of Republicans, think the economy is already in recession.
