US economy shrinks in second quarter, signaling
unofficial start of recession
The bad news will be a major blow for the Biden
administration as it prepares for a tough midterm election season
Dominic
Rushe
@dominicru
Thu 28 Jul
2022 13.33 BST
https://www.theguardian.com/business/2022/jul/28/us-economy-gdp-second-quarter
The US
economy shrank again in the last three months, unofficially signaling the start
of a recession.
The
commerce department announced Thursday that gross domestic product (GDP) – a
broad measure of the price of goods and services – decreased 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 major blow for the Biden administration as it prepares for a
tough midterm election season. White House officials have tried to tamp down
talk of a recession, arguing that many parts of the economy remain strong.
The growth
rate stands in marked contrast to the robust 6.9% annual increase in GDP
recorded in the final quarter of 2021 when the economy roared back from Covid
shutdowns.
The fast
pace of growth contributed to soaring inflation – now running at 40-year highs
– and the Federal Reserve’s decision to sharply increase interest rates in
order to bring down prices.
The
changing economic environment was reflected in the GDP report. Consumer
spending – the largest driver of the economy – slowed over the quarter but
remained positive, rising 1% on an annual basis. Residential fixed investment,
or home construction, dropped 14% on an annual basis and slowing business
inventories, goods produced but not yet sold by businesses, dragged down the
GDP number.
Two
quarters of negative GDP growth are widely regarded as a signal that the
economy has gone into 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 into the NBER’s final verdict, it also looks at a wider range
of economic factors, including the jobs market, and is unlikely to give its
decision soon.
“The 0.9%
annualized fall in GDP in the second quarter is disappointing but doesn’t mean
the economy is in recession,” said Andrew Hunter, senior US economist at
Capital Economics. “That said, the details show that higher rates and surging
inflation are weighing on underlying demand, and we expect only a muted rebound
in economic growth over the second half of the year.”
In the
meantime, pressure remains on the Biden administration. Surveys of consumer
confidence are falling as recession fears grow and Joe Biden’s overall and
economic approval poll numbers are at the lowest levels of his presidency.
In a
statement, Biden said it was “no surprise that the economy is slowing down as
the Federal Reserve acts to bring down inflation. But even as we face historic
global challenges, we are on the right path and we will come through this
transition stronger and more secure.”
Republicans
countered that the report shows “Democrats’ reckless economic policies are
destroying our economy”.
The latest
GDP figures came a day after the Fed announced another three-quarter of a
percentage point increase in its benchmark interest rates as it fights to tame
inflation.
Prices rose
at an annual rate of 9.1% in the year to June, driven up by soaring costs for
fuel, food and shelter.
While parts
of the US economy remain strong – most notably the jobs market – the Covid pandemic
continues to play havoc with 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 and led some economists to predict a recession is coming. Nearly 70% of
leading academic economists polled by the Financial Times last month predicted
the US economy will tip into a recession next year.
Fed chair
Jerome Powell said on Wednesday that he did not believe the US was now in a
recession. But he said the Fed was prepared to keep raising rates in order to
bring prices back down and that it was inevitable that such a move would slow
the economy and affect the job market. “Price stability is what makes the whole
economy work,” said Powell.
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