The U.S. economy contracted for the 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 for the period, according to the preliminary estimate. This follows a 1.6% decline in the first quarter and was worse than the Dow Jones estimate for a 0.3% gain.
Officially, the National Bureau of Economic Research declares recessions and expansions, and likely won’t pass judgment on the period in question for months or more.
But a second consecutive negative GDP reading fits a long-held baseline view of recession, despite the unusual circumstances of the decline 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 clearly economic growth is slowing,” said Mark Zandi, chief economist at Moody’s Analytics. “The economy is close to stall speed, making progress but barely.”
Markets reacted little to the news, with stock futures flat. Yields on government bonds have mostly fallen, with the largest declines being at the shorter end of the curve.
A separate report on Thursday showed layoffs remain high. Initial jobless claims totaled 256,000 for the week ended July 23, down 5,000 from the upwardly revised level the previous week, but higher than the Dow Jones estimate of 249,000.
The decline was due to a wide range of factors, including declining inventories, residential and non-residential investment, and government spending at the federal, state and local levels. Gross private domestic investment fell 13.5% for the three-month period
Consumer spending, as measured by personal consumption expenditure, rose just 1% for the period, as inflation accelerated. Spending on services rose 4.1% over the period, 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, dampened growth in the second quarter, subtracting 2 percentage points in total.
Inflation was the root of much of the economy’s problems. The consumer price index rose 8.6% in the quarter, the fastest pace since the fourth quarter of 1981. This caused inflation-adjusted personal after-tax income to fall by 0. 5%, while the personal savings rate was 5.2%, down from 5.6%. in the first trimester.
“It was really scripting,” Zandi said of the report. “The only encouraging thing is that inventories have played such a big role. They won’t play the same role in the next quarter. Hopefully consumers keep spending and businesses keep investing and if they do , we will avoid a 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 issues, initially caused by an outsized demand for goods versus services during the covid pandemic, were at the heart of the problem. It only intensified when Russia invaded Ukraine in February and, more recently, when China adopted strict shutdown measures to combat an explosion in Covid cases.
The first quarter figures were also reduced by a growing trade imbalance and a slowdown in inventories, which were responsible for much of the GDP gains in the second half of 2021.
Now the economy faces more fundamental problems.
Inflation started to swell a year ago, then exploded in 2022, hitting its biggest 12-month increase since 1981 in June. A slow response from policymakers initially led to some of the largest interest rate hikes the United States has ever seen.
The Federal Reserve over the past 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.
Still, Fed Chairman Jerome Powell said Wednesday that he expects the increases to reduce inflation and that he doesn’t see the economy in recession.
Indeed, most economists do not expect the NBER to declare an official recession, despite consecutive quarters of negative growth. On the contrary, the sentiment on Wall Street is that the economy may well go into recession later this year or in 2023, but is not now.
However, this may not be enough to change public perception. A Morning Consult/Politico poll earlier this month indicated that 65% of registered voters, including 78% Republicans, believe the economy is already in a recession.
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