The US economy contracted again over the past three months, unofficially signaling the beginning of a recession.
The Commerce Department said on Thursday that gross domestic product (GDP) – a broad measure of the price of goods and services – fell at an annual rate of 0.9% in the second quarter, after expanding at an annual rate of 1.6% had fallen.
The bad news will be a major blow to the Biden administration as it prepares for a tough mid-election season. White House officials have tried to quash talk of a recession by arguing that many parts of the economy remain strong.
The growth rate stands in stark contrast to the robust 6.9% annual GDP growth recorded in the final quarter of 2021, as the economy roared back from Covid shutdowns.
The rapid pace of growth contributed to soaring inflation – now at a 40-year high – and the Federal Reserve’s decision to sharply raise interest rates to bring prices down.
The changing economic environment was reflected in the GDP report. Consumer spending — the economy’s biggest driver — slowed over the quarter but remained positive, rising 1% on a yearly basis. Residential investment, or housing construction, fell 14% on an annualized basis and the slowdown in corporate inventories, commodities produced by companies but not yet sold, dragged the GDP figure down.
Two quarters of negative GDP growth is widely accepted as a signal that the economy has entered a recession. But the National Bureau of Economic Research (NBER) is the official arbiter of when recessions start and end. While GDP numbers will feed into NBER’s final verdict, it also looks at a broader range of economic factors, including the labor market, and is unlikely to make its decision anytime soon.
“The 0.9% annualized decline in GDP in the second quarter is disappointing, but it doesn’t mean the economy is in recession,” said Andrew Hunter, chief US economist at Capital Economics. “However, the details show that higher interest rates and rising inflation are weighing on underlying demand and we expect only a muted recovery in economic growth in the second half of the year.”
Meanwhile, pressure on the Biden administration remains. Consumer confidence surveys fall as recession fears mount and Joe Biden’s general and economic approval ratings are at the lowest levels of his presidency.
In a statement, Biden said it was “no surprise that the economy is slowing as the Federal Reserve acts to bring down inflation.” But even as we face historic global challenges, we are on the right track and will come through this transition stronger and more confident.”
Republicans countered that the report showed “that the Democrats’ ruthless economic policies are destroying our economy.”
The latest GDP numbers came a day after the Fed announced another three-quarters-of-a-point hike in interest rates to tame inflation.
Prices rose 9.1% annually through June, driven by rising fuel, food and housing costs.
While parts of the US economy remain strong – most notably the job market – the Covid pandemic continues to ravage global supplies and the war in Ukraine has pushed up energy prices.
The confusing economic outlook has triggered sell-offs in stock markets around the world, prompting some economists to predict an impending recession. Nearly 70% of top academic economists polled by the Financial Times last month predicted the US economy will slide into recession next year.
Fed Chair Jerome Powell said on Wednesday he doesn’t think the US is now in a recession. But he said the Fed is poised to raise rates further to bring prices back down and it was inevitable that such a move would slow the economy and hurt jobs. “Price stability is what keeps the whole economy going,” Powell said.