The US economy has contracted again in the past three months, which unofficially signals the beginning of a recession.
The Commerce Department announced Thursday that gross domestic product – a broad measure of prices for goods and services – declined at an annual rate of 0.9% in the second quarter after declining at an annual rate of 1.6% in the first three months. .
The bad news will be a huge blow to the Biden administration as it prepares for a difficult midterm election season. White House officials have tried to limit talk of a recession, arguing that many parts of the economy are still strong.
The growth rate stands in marked contrast to the strong annual increase of 6.9% in GDP recorded in the last quarter of 2021 when the economy returned from the Covid lockdown.
The rapid pace of growth contributed to rising inflation – now at its highest level in 40 years – and the Federal Reserve’s decision to raise interest rates sharply in order to bring prices down.
The changing economic environment was reflected in the GDP report. Consumer spending – the biggest driver of the economy – slowed during the quarter but remained positive, rising 1% year over year. Fixed residential investment, or home construction, is down 14% year over year, and slowing business inventories, goods produced but not yet sold by businesses, have lowered the GDP figure.
Two quarters of negative GDP growth is widely seen as a sign that the economy has entered a recession. But the National Bureau of Economic Research (NBER) is the official arbiter of when recessions begin and end. While the GDP numbers will play into the final judgment of the National Bureau of Economic Research, it also looks at a wide range of economic factors, including the labor market, and is unlikely to make a decision soon.
“The 0.9% annualized decline in GDP in the second quarter is disappointing, but it does not mean the economy is in a recession,” said Andrew Hunter, chief US economist at Capital Economics. “However, the details show that high rates and high inflation are weighing on core demand, and we only expect a slight rebound in economic growth during the second half of the year.”
In the meantime, pressure remains on the Biden administration. Consumer confidence surveys are slipping as recession fears grow, overall poll numbers and Joe Biden’s economic approval are at the lowest levels of his presidency.
“It is no surprise that the economy is slowing while the Federal Reserve works to bring down inflation,” Biden said in a statement. “But even as we face historic global challenges, we are on the right track and through this transition will be stronger and safer.”
Republicans responded by saying that the report shows that “the reckless economic policies of the Democrats are destroying our economy.”
The latest GDP numbers came a day after the Federal Reserve announced another three-quarter percentage point increase in its benchmark interest rates, as it struggles to tame inflation.
Prices rose at an annual rate of 9.1% in the year to June, driven by rising costs for fuel, food and shelter.
While parts of the US economy remain strong – most notably the job market – the Covid pandemic continues to wreak havoc on global supplies, and the war in Ukraine has sent energy prices soaring.
The confusing economic outlook led to a sell-off in stock markets around the world and led some economists to predict an upcoming recession. Nearly 70% of leading academic economists polled by the Financial Times last month predicted that the US economy will enter a recession next year.
Federal Reserve Chairman Jerome Powell said on Wednesday that he does not believe the United States is now in a recession. But he said the Fed was ready to continue raising interest rates in order to bring rates down again, and that such a move was bound to slow the economy and affect the labor market. “Price stability is what makes the entire economy work,” Powell said.
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