The US economy contracted for the second consecutive quarter, meeting one common criterion of technical stagnation and complicating the Federal Reserve’s push to stamp out spiraling inflation with a series of sharp interest rate increases.
Data released by the Commerce Department on Thursday showed gross domestic product fell 0.9 percent year on year in the second quarter, or a 0.2 percent drop from the previous quarter. This comes after Q1 GDP data showing US economy It shrank 1.6 percent in the first three months of 2022.
Successive quarterly contractions meet one definition of a recession, although the US is counting on a determination by a group of researchers at the National Bureau of Economic Research who look at a broader set of factors.
The White House has confirmed that the US economy is not currently in a recession, with Treasury Secretary Janet Yellen saying earlier this week that she would be “surprised” if the National Bureau of Economic Research announced that.
She confirmed that message at a press conference on Thursday, stressing that the economy “remains resilient.”
“Most economists and most Americans have a similar definition to a recession: massive job losses and mass layoffs, business closures, private sector activity slowing dramatically, household budgets under tremendous strain. In short, a widespread weakening of our economy. “That’s not what we’re seeing now.”
But two consecutive quarters of negative growth will nonetheless intensify further pressure on President Joe Biden, who suffers from low acceptance rates and has repeatedly described a strong economy as one of his administration’s major accomplishments.
Shortly after the data was released, Biden said: “It is not surprising that the economy is slowing as the Federal Reserve works to bring down inflation.
“But even as we face historic global challenges, we are on the right track and through this transition will be stronger and safer. Our labor market remains historically strong.”
At a press conference on Wednesday after the Federal Reserve raised interest rates by 0.75 percentage points for the second month in a row, President Jay Powell said he did not think the United States was in a recession. He noted the strength in the economy, including in the labor market, but noted that growth must slow and the labor market must calm down in order to tame inflation.
The labor market has yet to show significant signs of weakness, with the US adding jobs at a healthy pace, at an average of nearly 380,000 per month During the past three months. The unemployment rate also remains historically low at 3.6 percent, which is just below the pre-coronavirus pandemic level.
“No one is going to look at two quarters in the United States that have an unemployment rate of 3.6 percent and call it stagnation,” said Claudia Sam, founder of Arrow Consulting and a former economist at the Federal Reserve. “We are not in a recession in the truest sense of the word, which is a persistent, widespread contraction in economic activity.”
The fallout from the GDP data ripples through debt markets. The two-year Treasury yield, which moves in line with interest rate expectations, fell, indicating that investors were betting that the Fed might have to slow the pace of rate increases. The 10-year yield, which moves with growth and inflation expectations, fell to its lowest level since April.
Despite the decline in core GDP, personal consumption, which provides insight into the health of the American consumer, grew 1 percent in the second quarter, compared to growth of 1.8 percent in the first three months of the year.
The biggest drag on second-quarter GDP was a drop in business inventories, which wiped out two percentage points from the headline figure.
Some economists believe this was a long-term effect of the pandemic economy last year when business inventories soared as shelves were restocked after supply chain bottlenecks related to Covid-19 began to ease. But economists said the slowdown also reflects the dampening effect of higher interest rates by the Federal Reserve on business investment.
Inventory data has been very volatile for the past two years. “Inventory management has been very difficult, partly because of the supply chain problem and partly because the demand for goods has been so hot,” said Brian Smedley, economist at Guggenheim Partners.
The large interest rate increases implemented by the central bank in recent months have begun to rein in the economy, and market participants are watching closely to see if this rapid tightening will push the United States into an official recession.
This was evident in the housing market. Gross domestic product data shows that residential investment fell 14 percent in the second quarter, just as higher interest rates started to drive up mortgage rates. The additional increases will pose additional challenges to the housing sector.
Economists said the data is unlikely to change the Fed’s calculations about the forward course of policy.
“I don’t think the GDP print will or should affect the Fed,” said Eric Winograd, an economist at Alliance Bernstein.
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