US economy shrinks for second straight quarter

US economy shrinks for second straight quarter

The U.S. economy contracted for a second straight quarter, meeting one of the common criteria for a technical recession and complicating the Federal Reserve’s efforts to stamp out soaring inflation with a series of rate hikes. aggressive.

Data released Thursday by the Commerce Department showed gross domestic product fell 0.9% on an annual basis in the second quarter, down 0.2% from the previous quarter. This follows first-quarter GDP data showing the US economy contracted 1.6% in the first three months of 2022.

The back-to-back quarterly contractions meet the technical definition of a recession, though the United States is relying on a determination by a group of National Bureau of Economic Research researchers who look at a broader range of factors.

The White House has maintained that the US economy remains strong and is not currently in recession, with Treasury Secretary Janet Yellen saying earlier this week that she would be “amazed” if the NBER said so.

But two straight quarters of negative growth will nonetheless put additional pressure on US President Joe Biden, who faces low approval ratings and has repeatedly touted a strong economy as one of his administration’s key achievements.

Shortly after the data was released, Biden said, “It’s no surprise the economy is slowing as the Federal Reserve moves to bring inflation down.

“But even though we face historic global challenges, we are on the right track and we will get through this transition stronger and safer. Our labor market remains historically strong.

At a press conference on Wednesday after the Fed raised interest rates by 0.75 percentage points for the second month in office, Chairman Jay Powell said he does not believe the United States United were in a recession. He underscored the strength of the economy, including the labor market, but noted that growth is expected to slow and the labor market should cool down to bring inflation under control.

The labor market has yet to show significant signs of weakness, with the United States adding jobs at a healthy pace, averaging around 380,000 per month over the past three months. The unemployment rate also remains at a historic low of 3.6%, just below its pre-pandemic level.

Economically, two consecutive quarters of negative growth impacted debt markets. The two-year Treasury yield, which moves with interest rate expectations, plunged, suggesting investors were betting the Fed may need to slow its pace of raising interest rates.

Despite the drop in GDP, personal consumption, which provides insight into the health of the American consumer, rose 1% in the second quarter, compared with growth of 1.8% in the first three months of the year.

The biggest drag on second-quarter GDP was a decline in business inventors, which erased 2 percentage points from the overall figure.

Some economists believe this is a lingering effect of last year’s pandemic economy, when commercial inventors surged as shelves were replenished after supply chain bottlenecks linked to Covid-19 have started to loosen up. The decline in inventory investment also reflects the dampening effect the Fed’s interest rate hikes have had on business investment, economists said.

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

The steep rate hikes put in place by the central bank in recent months have begun to dampen the economy, and market participants are watching closely to see if this rapid tightening will tip the United States into an official recession.

However, the data is unlikely to change the Fed’s calculus on the way forward for current policy, economists said.

“GDP is a measure of economic activity, but as comprehensive as it sounds. . . The labor market will be the best indicator of whether we are really heading into a recession and whether companies are really cutting back on hiring,” said EY-Parthenon economist Gregory Daco.

“I don’t think the GDP print would or should influence the Fed,” said AllianceBernstein economist Eric Winograd.

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