The US economy has contracted again over the past three months, unofficially signaling the onset of a recession.
The Commerce Department reported 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 falling at an annual rate of 1. 6% in the first three months. .
The bad news will be a blow to the Biden administration as it prepares for a tough midterm election season. White House officials have tried to stifle talk of a recession, arguing that many parts of the economy remain strong.
The growth rate contrasts sharply with the solid 6.9% annual increase in GDP recorded in the last quarter of 2021, when the economy rebounded from the Covid shutdowns.
The rapid pace of growth has contributed to soaring inflation – now reaching 40-year highs – and the Federal Reserve’s decision to raise interest rates sharply in order to bring prices down.
The changing economic environment was reflected in the GDP report. Consumer spending – the main driver of the economy – slowed in the quarter but remained positive, rising 1% year on year. Residential fixed investment, or home building, fell 14% on an annual basis and the slowdown in business inventories, goods produced but not yet sold by businesses, led to a decline in GDP.
Two quarters of negative GDP growth are widely seen 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 begin and end. While the GDP figures will play a role in the NBER’s final verdict, it is also looking at a wider range of economic factors, including the jobs market, and is unlikely to deliver its decision anytime soon.
“The 0.9% annualized fall in GDP in the second quarter is disappointing but does not mean the economy is in recession,” said Andrew Hunter, senior US economist at Capital Economics. “That said, the details show that rising rates and soaring inflation are weighing on underlying demand, and we expect only a moderate rebound in economic growth in the second half of the year. year.”
In the meantime, the pressure remains on the Biden administration. Consumer confidence surveys are falling as recession fears grow and Joe Biden’s global and economic approval polls are at the lowest levels of his presidency.
In a statement, Biden said it was “not surprising that the economy is slowing as the Federal Reserve acts to bring inflation down. But even though we face historic global challenges, we are on the right track and will come through this transition stronger and safer. »
Republicans countered that the report shows “the Democrats’ reckless economic policies are destroying our economy.”
The latest GDP figures came a day after the Fed announced another three-quarters of a percentage point hike in its benchmark interest rates as it struggles to get inflation under control.
Prices rose at an annual rate of 9.1% in the year to June, driven by soaring fuel, food and housing costs.
While parts of the US economy remain strong – notably the labor market – the Covid pandemic continues to wreak havoc on global supply and the war in Ukraine has driven up energy prices.
The confusing economic outlook has sparked a sell-off in stock markets around the world and led some economists to predict a recession is approaching. Nearly 70% of leading academic economists polled by the Financial Times last month predicted that the US economy would tip into a recession next year.
Fed Chairman Jerome Powell said Wednesday he does not believe the United States is now in a recession. But he said the Fed was ready to keep raising rates to drive down prices and that such a move was inevitable to slow the economy and hurt the labor market. “Price stability is what makes the whole economy work,” Powell said.