The U.S. economy shrank 0.9% last quarter, its second straight decline
WASHINGTON — The U.S. economy contracted from April through June for a second straight quarter, contracting at an annual rate of 0.9% and raising fears the country could be on the verge of a recession.
The Commerce Department’s Thursday decline in gross domestic product — the broadest measure of the economy — followed a 1.6% annual decline from January through March. Consecutive quarters of declining GDP are an informal, but not definitive, indicator of a recession.
The GDP report for the last quarter highlighted the weakness in the economy. Consumer spending slowed as Americans purchased fewer goods. Business investment fell. Inventories fell as businesses slowed their restocking of shelves, losing 2 percentage points of GDP.
Rising interest rates, a consequence of the Federal Reserve’s series of rate hikes, undermined home construction, which fell at an annual rate of 14%. Public spending also fell.
The report comes at a critical time. Consumers and businesses struggled under the weight of suppressed inflation and rising borrowing costs. On Wednesday, the Fed raised its benchmark interest rate by three-quarters of a point for the second straight time in a bid to beat the worst inflation spike in four decades.
The Fed hopes to achieve a notoriously difficult “soft landing”: an economic slowdown that manages to rein in soaring prices without triggering a recession.
Apart from the United States, the global economy as a whole is also struggling with high inflation and weakening growth, especially after Russia’s invasion of Ukraine sent oil prices skyrocketing. energy and food. Europe, highly dependent on Russian natural gas, appears particularly vulnerable to a recession.
In the United States, surging inflation and fears of a recession have eroded consumer confidence and fueled public anxiety about the economy, which is sending frustrating and mixed signals. And with November’s midterm elections approaching, American discontent has lowered President Joe Biden’s public approval rating and increased the likelihood that Democrats will lose control of the House and Senate.
Fed Chairman Jerome Powell and many economists have said that while the economy is weakening, they doubt it is in recession. Many of them point, in particular, to a still robust labor market, with 11 million job vacancies and an exceptionally low unemployment rate of 3.6%, to suggest that a recession, if one occurs , is still a long way off.
“The consequent contraction in GDP will fuel the debate over whether the United States is in recession or heading there soon,” said Sal Guatieri, senior economist at BMO Capital Markets. “The fact that the economy created 2.7 million payrolls in the first half seems to run counter to an official call for recession for now.”
Still, Guatieri said, “the economy quickly lost steam in the face of high inflation for four decades, rapidly rising borrowing costs and a general tightening of financial conditions.”
Thursday’s first of three government estimates of GDP for the April-June quarter marks a drastic weakening from the 5.7% growth the economy achieved last year. It was the fastest calendar-year expansion since 1984, reflecting how strongly the economy recovered from the brief but brutal pandemic recession of 2020.
But since then, the combination of rising prices and rising borrowing costs have taken their toll. The Labor Department’s consumer price index climbed 9.1% in June from a year earlier, a pace not seen since 1981. And despite widespread wage increases, prices are rising faster than wages. In June, the average hourly wage, after adjusting for inflation, fell 3.6% from a year earlier, the 15th consecutive year-over-year decline.
Americans continue to spend, albeit more tepidly. Thursday’s report showed consumer spending grew at an annual rate of 1% from April to June, compared with 1.8% in the first quarter and 2.5% in the last three months of 2021.
Spending on goods like appliances and furniture, which had soared as Americans sheltered at home at the start of the pandemic, fell at a rate of 4.4% last quarter. Spending on services like air travel and dining out rose 4.1%, indicating that millions of consumers are venturing more.
Before taking into account the price spike, the economy actually grew at an annual rate of 7.8% in the April-June quarter. But inflation wiped out that gain, then part of it, and produced negative GDP.
In this context, Americans are losing confidence. Their assessment of economic conditions six months from now has hit its lowest point since 2013, according to the Conference Board, a research group.
Recession risks rose as Fed policymakers continued a rate hike campaign that will likely continue through 2023. Fed hikes have already led to higher rates on credit cards and auto loans and a doubling of the 30-year average rate. year fixed mortgage in the past year, to 5.5. Home sales, which are particularly sensitive to changes in interest rates, fell.
Even though the economy records a second consecutive quarter of negative GDP, many economists do not consider it to constitute a recession. The most widely accepted definition of recession is that determined by the National Bureau of Economic Research, a group of economists whose Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that spreads through the whole economy and lasts more than a few months.
The committee weighs a range of factors before publicly declaring an economic boom dead and a recession in the making – and often does so long after the fact.
This week, Walmart, the nation’s largest retailer, lowered its earnings outlook, saying higher gas and food prices were forcing shoppers to spend less on many discretionary items, like new clothes.
Manufacturing is also slowing down. US factories have seen 25 consecutive months of expansion, according to the Institute for Supply Management’s manufacturing index, although supply chain bottlenecks have made it difficult for factories to fill orders.
But now the factory boom is showing signs of strain. The ISM index fell last month to its lowest level in two years. New orders fell. Factory hiring fell for a second straight month.
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