WASHINGTON (AP) — The U.S. economy contracted from April through June for the second consecutive quarter, contracting at an annual rate of 0.9% and raising fears the country could be on the verge of a recession.
The decline the Commerce Department reported Thursday 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 bought fewer goods. Business investment fell. Inventories fell as businesses slowed their restocking of shelves, slashing GDP by 2 percentage points.
Rising lending rates, the result of a series of Federal Reserve rate hikes, have rattled home construction, which has contracted 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 loan costs. On Wednesday, the Fed raised its benchmark rate by three-quarters of a point for the second straight time in its effort to beat the worst inflation spike in four decades.
The Fed hopes to achieve a notoriously difficult result “soft landing”: An economic slowdown that manages to contain the surge in 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 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 raised concerns about the economy, which is sending frustrating and mixed signals. And ahead of November’s midterm elections, American discontent has lowered President Joe Biden’s public approval rating and could increase 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 unusually low unemployment rate of 3.6%, to suggest that a recession, if one occurs , is not there yet.
“The consequent contraction in GDP will fuel the debate over whether the United States is in or soon heading into 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 seems to run counter to an official call for recession for now.”
Yet, Guatieri said, “The economy quickly faltered in the face of high inflation for four decades, rapidly rising borrowing costs and a general tightening of financial conditions.”
In the meantime, Congress could move toward approving inflation-fighting measures under a deal announced Wednesday by Senate Majority Leader Chuck Schumer and Sen. Joe Manchin, a Democrat. of West Virginia. Among other things, the measure would allow Medicare to negotiate prescription drug prices with drug companies, and the new revenue would be used to lower drug costs for seniors.
Following Thursday’s government report, Biden dismissed any notion that the data portrayed an economy in recession. The administration pointed out that the solid job growth and low unemployment rate show that the US economy continues to grow despite two consecutive quarterly declines in GDP. Speaking from the White House, Biden relied on remarks from Powell and other economic leaders.
“Chairman Powell and many prominent banking staff and economists say we’re not in a recession,” said the president.
The government’s first of three GDP estimates for the April-June quarter marked a drastic weakening from the 5.7% growth the economy achieved last year.
This is the fastest calendar-year expansion since 1984, reflecting the strength with which the economy rebounded 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 soared 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 an annual rate of 4.4% last quarter. But spending on services, like air travel and dining out, rose 4.1%, indicating that millions of consumers are venturing out 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.
Fed hikes have already led to higher rates on credit cards and auto loans and a doubling of the average rate on a 30-year fixed mortgage over 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 spans the entire economy and lasts for 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.
“If we’re not in a recession yet, we will be soon,” said Joshua Shapiro, chief U.S. economist for economic advisory firm Maria Fiorini Ramirez Inc.A rapidly shrinking economy combined with aggressive monetary tightening is not a recipe for a soft landing or any other type of happy ending.