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 annualized basis in the second quarter, down 0.2% from the previous quarter. This follows first-quarter GDP data showing the US economy shrank 1.6% in the first three months of 2022.
The back-to-back quarterly contractions meet one definition of a recession, though the United States relies on a determination by a group of National Bureau of Economic Research researchers who examine a broader range of factors.
The White House has maintained that the US economy is not currently in recession, with Treasury Secretary Janet Yellen saying earlier this week that she would be “amazed” if the NBER said it was.
She underscored that message at a press conference on Thursday, stressing that the economy “remains resilient.”
“Most economists and most Americans have a similar definition of recession: substantial job losses and massive layoffs, business closures, a dramatic slowdown in private sector activity, family budgets strained. In sum, a general weakening of our economy,” she said. “That’s not what we’re seeing right now.”
But two straight quarters of negative growth will nonetheless put additional pressure on President Joe Biden, who faces low approval ratings and has repeatedly touted a strong economy as one of his administration’s great 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 news conference on Wednesday after the Fed raised interest rates 0.75 percentage points for the second consecutive month, Chairman Jay Powell said he did not believe the United States was in 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 historically low at 3.6%, just below its pre-coronavirus pandemic level.
“Nobody would look at two quarters in the United States of 3.6% unemployment and call it a recession,” said Claudia Sahm, founder of Sahm Consulting and a former Fed economist. “We are not in a recession in the real sense of the word, which is a sustained and widespread contraction in economic activity.
The fallout from the GDP data spilled over into 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. The 10-year yield, which moves with growth and inflation expectations, fell to its lowest level since April.
Despite the decline in overall GDP, personal consumption, which provides insight into the health of the US consumer, rose 1% in the second quarter, compared to 1.8% growth in the first three months of the year.
The biggest drag on second-quarter GDP was a decline in business inventories, which erased 2 percentage points from the overall figure.
Some economists believe it is a lingering effect of last year’s pandemic economy when business inventories rose as shelves were replenished after supply chain bottlenecks linked to Covid-19 have started to loosen up. But the slowdown also reflects the dampening impact of Fed interest rate hikes 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 problem and partly because the demand for goods was hot,” said Brian Smedley, economist at Guggenheim Partners.
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.
This has been evident in the housing market. GDP data shows residential investment fell 14% in the second quarter, just as rising interest rates began to push mortgage rates higher. Further increases will pose additional challenges to the housing sector.
Economists said the data was unlikely to change the Fed’s calculus on the way forward for policy.
“I don’t think the GDP print would or should influence the Fed,” said AllianceBernstein economist Eric Winograd.