US economy shrinks in second quarter, GDP shows, calls for talk of recession

Numbers: The US economy contracted at an annualized pace of 0.9% in the second quarter to mark the second consecutive decline, fueling the debate over whether the US has really sunk into recession.

Gross domestic product, a measure of the economy’s performance, contracted at a pace of 1.6% in the first three months of the year.

Economists in a Wall Street Journal poll expected a 0.3% increase in GDP for the second quarter. All figures are adjusted for inflation.

The consecutive declines in GDP were the first since the Great Recession of 2007-2009.

A sharp drop in business investment and largely low inventory levels printed negative GDP in the second quarter. Government spending has also fallen sharply.

The only bright spot: Consumer spending, the main driver of the economy, was up 1% annually, but that was the smallest increase since the pandemic recovery began.

While two consecutive quarters of declining GDP have generally been seen as stagnation, the group of eminent economists responsible for declaring official recessions takes a broader view that the old rule does not always apply.

The definition of a recession has become a subject of intense debate ahead of the fall’s US congressional elections. The Biden White House argued that the United States is not in a recession, but Republicans want to blame Democrats for the slowdown in economic growth.

The Big Picture: The economy is slowing down. No doubt about it.

The Federal Reserve has raised its benchmark interest rate in the United States by 2.5 percentage points since March in an effort to combat the largest increase in inflation in nearly 41 years. The cost of living rose 9.1% in the twelve months to June.

Higher interest rates tend to slow the economy by making borrowing more expensive for businesses and consumers.

However, few economists believe that the US is already in a recession. While many believe an economic downturn is inevitable, they say it likely won’t start until the end of 2022 or sometime in 2023.

Key details:

  • Consumer spending rose an average of 1% in the second quarter, compared to an average of 2.3% in the 10 years prior to the pandemic. Household purchases account for about 70% of US economic activity.

  • Business fixed investment fell 3.9% – the largest drop since the early stages of the pandemic. Equipment spending, a good indicator of future growth prospects, fell 2.7%. Builders have also cut back on investment in new housing.

  • The US trade deficit decreased after hitting its highest level in the first quarter. Imports rose only 3.1% while exports jumped 18%. The record trade gap was largely responsible for the drop in first-quarter GDP.

  • The value of inventories shrank by $106.9 billion and subtracted two percentage points from core GDP. Mass storage at the end of 2021 caused Q4 GDP to rise and now the process has been reversed.

  • Government spending fell 1.9% in the second quarter.

  • Inflation increased at an annual rate of 7.1%, the highest rate since 1981.

I look ahead: “Another drop in GDP will renew statements that we are in a recession, but a broader look at the data shows that it is unlikely” that employment and spending are strong, and more Americans earn checks salaries and getting increases in light of the tight labor market.”

“While two consecutive quarters of negative growth technically represent a recession, other, more recent economic data is not in line with a recession,” said Seema Shah, chief global strategist at Principal Global Investors.

But, she added, “it has thrown the biggest Fed tightening cycle since the 1980s, and a recession is highly likely in early 2023.”

market reaction: Dow Jones Industrial Average DJIA,
and the S&P 500 SPX,
It rose in trading Thursday.

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