Recession fears deepen as US economy shrinks for second quarter
The United States economy shrank from April through to June for a second straight quarter, contracting at a 0.9 per cent annual pace and raising fears that the nation may be approaching a recession.
The decline that the US Commerce Department reported on Thursday in the gross domestic product — the broadest gauge of the economy — followed a 1.6 per cent annual drop from January through to March. Consecutive quarters of falling GDP constitute one informal, though not definitive, indicator of a recession.
The GDP report for last quarter pointed to weakness across the economy. Consumer spending slowed as Americans bought fewer goods. Business investment fell. Inventories tumbled as businesses slowed their restocking of shelves, shedding two percentage points from GDP.
Higher interest rates, a consequence of the Federal Reserve’s series of rate hikes, clobbered home construction, which shrank at a 14 per cent annual rate. Government spending dropped, too.
The report comes at a critical time. Consumers and businesses have been struggling under the weight of punishing inflation and higher borrowing costs. On Wednesday, the Fed raised its benchmark interest rate by a sizeable three-quarters of a point for a second straight time 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 slowdown that manages to rein in rocketing 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 energy and food prices soaring. Europe, highly dependent on Russian natural gas, appears especially vulnerable to a recession.
In the United States, the inflation surge and fear of a recession have eroded consumer confidence and stirred public anxiety about the economy, which is sending frustratingly mixed signals. And with the November midterm elections nearing, Americans’ discontent has diminished President Joe Biden’s public approval ratings and increased the likelihood that the Democrats will lose control of the House and Senate.
Fed Chair Jerome Powell and many economists have said that while the economy is showing some weakening, they doubt it’s in recession. Many of them point, in particular, to a still-robust labour market, with 11 million job openings and an uncommonly low 3.6 per cent unemployment rate, to suggest that a recession, if one does occur, is still a ways off.
“The back-to-back contraction of GDP will feed the debate about whether the US is in, or soon headed for, a recession,” said Sal Guatieri, senior economist at BMO Capital Markets. “The fact that the economy created 2.7 million payrolls in the first half of the year would seem to argue against an official recession call for now.”
Still, Guatieri said, “the economy has quickly lost steam in the face of four-decade-high inflation, rapidly rising borrowing costs, and a general tightening in financial conditions”.
Thursday’s first of three government estimates of GDP for the April-June quarter marks a drastic weakening from the 5.7 per cent growth the economy achieved last year. That was the fastest calendar year expansion since 1984, reflecting how vigorously the economy roared back from the brief but brutal pandemic recession of 2020.
But since then, the combination of mounting prices and higher borrowing costs have taken a toll. The US Labor Department’s consumer price index skyrocketed 9.1 per cent in June from a year earlier, a pace not matched since 1981. And despite widespread pay raises, prices are surging faster than wages. In June, average hourly earnings, after adjusting for inflation, slid 3.6 per cent from a year earlier, the 15th straight year-over-year drop.
Americans are still spending, though more tepidly. Thursday’s report showed that consumer spending rose at a one per cent annual pace from April through to June, down from 1.8 per cent in the first quarter and 2.5 per cent in the final three months of 2021.
Spending on goods like appliances and furniture, which had soared while Americans were sheltering at home early in the pandemic, dropped at a 4.4 per cent rate last quarter. Bit spending on services like airline trips and dinners out rose at a 4.1 per cent rate, indicating that millions of consumers are venturing out more.
Before accounting for surging prices, the economy actually grew at a 7.8 per cent annual pace in the April-June quarter. But inflation wiped out that gain, and then some, and produced a negative GDP number.
– AP