The US economy contracts for the second consecutive quarter

The US economy contracted for the second consecutive quarter, meeting one of the common criteria for a technical recession and complicating the Federal Reserve’s push to repress soaring inflation with a series of aggressive rate hikes.

Data released Thursday by the Commerce Department showed that gross domestic product fell 0.9% year on year in the second quarter, or 0.2% from the previous quarter. This follows first quarter GDP data showing that the US economy shrank by 1.6% in the first three months of 2022.

Consecutive quarterly contractions meet a definition of a recession, although the United States is based on the determination of a group of researchers from the National Bureau of Economic Research examining a wider range of factors.

The White House said the US economy is not currently in a recession, with Treasury Secretary Janet Yellen saying earlier this week that she would be “stunned” if the NBER declares it.

He highlighted that message at a press conference Thursday, noting that the economy “remains resilient”.

“Most economists and most Americans have a similar definition of a recession: substantial job losses and mass layoffs, businesses closing down, private sector businesses slowing considerably, family budgets under pressure. In summary, a generalized weakening of our economy, “he said.” That’s not what we’re seeing right now. ”

But two consecutive quarters of negative growth will still put further pressure on President Joe Biden, who is struggling with low approval ratings and has repeatedly touted a strong economy as one of his administration’s great successes.

Shortly after the data was released, Biden said, “Unsurprisingly, the economy is slowing as the Federal Reserve takes action to reduce inflation.

“But even as we face historic global challenges, we are on the right track and will overcome this transition stronger and safer. Our job market remains historically strong. “

Line chart of change in GDP, percentage (annualized) showing that the US economy contracted for the second consecutive quarter

In a press conference Wednesday after the Fed raised interest rates by 0.75 percentage points for the second consecutive month, President Jay Powell said he did not believe the US was in a recession. He pointed to the strength of the economy, including the labor market, but noted that growth should slow and the labor market must cool to tame inflation.

The job market has not yet shown significant signs of weakness, with the US adding jobs at a healthy pace, averaging around 380,000 per month for the past three months. The unemployment rate also remains historically low at 3.6%, just below the pre-coronavirus pandemic level.

“Nobody would look at two-quarters of US unemployment of 3.6% and call it a recession,” said Claudia Sahm, founder of Sahm Consulting and former Fed economist. “We are not in a recession in the truest sense of the word. which is a large and sustained contraction of economic activity “.

The fallout from the GDP data spread to the debt markets. The two-year Treasury yield, which moves with interest rate expectations, plummeted, suggesting investors were betting that the Fed could slow the pace of interest rate hikes. The 10-year yield, which moves with growth and inflation expectations, has fallen to its lowest level since April.

Despite the decline in GDP, personal consumption, which offers information on the health of US consumers, grew by 1% in the second quarter, compared to a growth of 1.8% in the first three months of the year.

The biggest obstacle to second-quarter GDP was the decline in business inventories, which wiped out 2 percentage points from the main figure.

Some economists believe this was a lingering effect of last year’s pandemic economy, as company inventories spiked due to shelf replenishment after Covid-19-related supply chain bottlenecks began to roll. loosen up. But the slowdown also reflects the braking impact the Fed interest rate hikes have had on business investment, economists said.

“The inventory data has been very volatile over the past two years. Inventory management has been very difficult, partly because of the supply chain problem and partly because the demand for goods was hot, ”said Brian Smedley, economist at Guggenheim Partners.

The central bank’s sharp rate hikes in recent months have started to hold back the economy, and market participants are watching closely whether this rapid tightening will send the US into an official recession.

This was evident in the real estate market. GDP data shows that residential investment fell 14% in the second quarter, just as higher interest rates started to drive mortgage rates up. Further increases will pose further challenges to the housing sector.

Economists have said that the data is unlikely to change the Fed’s calculation of the path forward for policy.

“I don’t think the GDP footprint can or should affect the Fed,” said AllianceBernstein economist Eric Winograd.

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