The U.S. economy contracted from April through June for the second consecutive quarter, shrinking at an annual rate of 0.9 percent and igniting concerns that the country might be headed for a recession.
The largest indicator of the economy, the gross domestic product, declined by the amount the Commerce Department reported on Thursday. This came after a 1.6 percent annual decline from January through March. One informal, but not absolutely certain, sign of a recession is GDP decline over successive quarters.
The GDP statistics for the previous quarter indicated economic decline nationwide. Americans bought less products, which caused a slowdown in consumer spending. Investment by business dropped. As companies delayed replenishing their shelves, inventories fell, reducing GDP by 2 percentage points.
Home construction fell at a 14 percent annual rate as a result of higher borrowing costs brought on by the Federal Reserve's string of rate increases. Additionally, government spending fell.
The release of the report is crucial. The burden of punishing inflation and rising lending fees has been difficult for both consumers and businesses. In an effort to combat the worst inflation outbreak in forty years, the Fed hiked its benchmark rate by a hefty three-quarters of a percent on Wednesday.
The famously challenging "soft landing" that the Fed is aiming for is an economic downturn that manages to contain skyrocketing prices without sparking a recession.
Other than the United States, the entire world economy is struggling with rising inflation and declining growth, particularly in the wake of Russia's invasion of Ukraine, which caused energy and food prices to spike. Given its reliance on Russian natural gas, Europe seems particularly susceptible to a downturn.
In the US, rising prices and worries about a recession have reduced consumer confidence and stoked economic concern, which is constantly sending contradictory signals. And as the midterm elections in November get near, the unhappiness of the populace has lowered President Joe Biden's public popularity ratings and may make it more likely that the Democrats would lose control of the House and Senate.
Even if the economy is showing signs of weakness, according to many analysts and Fed Chair Jerome Powell, they do not believe that a recession is underway. Many of them argue that a recession, if it happens, isn't yet here by highlighting the still-vibrant labor market, which has 11 million job opportunities and an incredibly low unemployment rate of 3.6 percent.
According to Sal Guatieri, senior economist at BMO Capital Markets, "the back-to-back drop of GDP will feed the argument about whether the U.S. is in, or shortly headed for, a recession."
"The creation of 2.7 million payrolls by the economy in the first half of the year would seem to argue against an official recession call for the time being," the author writes.
The economy has nevertheless "soon lost speed in the face of four-decade high inflation, fast rising borrowing costs and a broad tightening of financial conditions," Guatieri claimed.
According to a deal revealed on Wednesday by West Virginia Democrat Sen. Joe Manchin and Senate Majority Leader Chuck Schumer, Congress may be getting closer to approving steps to combat inflation. The proposal would permit Medicare to haggle over the cost of prescription drugs with drug makers, among other things, and use the extra money to reduce the cost of medicine for seniors.
"It's no surprise that the economy is slowing down as the Federal Reserve tries to bring down inflation," the president said in a statement after last year's historic economic growth and the recovery of all the private-sector jobs lost during the pandemic crisis. However, despite the unprecedented problems we confront on a global scale, we are on the right track, and we will emerge stronger and more secure from this change.
The first of three GDP estimates released by the government for the April–June quarter showed a sharp decline from the 5.7 percent growth the economy had in 2017. That year's expansion was the fastest in a calendar year since 1984, demonstrating how quickly the economy recovered from the devastating but short-lived pandemic recession of 2020.
However, since then, rising prices and greater borrowing costs have had a negative impact. Consumer price index data from the Labor Department showed a 9.1% increase over a year earlier in June, the highest rate since 1981. Additionally, prices are rising more quickly than incomes do despite widespread salary hikes. After accounting for inflation, average hourly wages fell 3.6 percent from a year earlier in June, marking the 15th consecutive monthly decline.
Although more slowly, Americans are still spending money. According to the study released on Thursday, consumer spending increased by 1% annually from April through June, down from 1.8% in the first quarter and 2.5% in the last three months of 2021.
Spending on items like furniture and appliances, which had risen when Americans were taking cover at home in the early stages of the pandemic, fell at a pace of 4.4 percent annually in the most recent quarter. However, expenditure on services—such as airfare and restaurant meals—rose at a rate of 4.1 percent, suggesting that millions of customers are going out more frequently.
Prior to taking into account price increases, the economy really expanded at an annual rate of 7.8 percent in the April-June quarter. However, inflation more than offset that gain, resulting in a negative GDP figure.
In light of this, Americans are becoming less confident. According to the Conference Board, a research organization, their forecast for the state of the economy six months from now has dropped to its lowest level since 2013.
Credit card and vehicle loan rates have already increased as a result of the Fed's rate increases, and the average rate on a 30-year fixed mortgage has doubled in the last year, to 5.5 percent. The number of homes sold has decreased, which is particularly susceptible to fluctuations in interest rates.
Many experts disagree that the economy is in a recession despite posting negative GDP for a second consecutive quarter. The National Bureau of Economic Research's Business Cycle Dating Committee defined a recession as "a major fall in economic activity that is spread across the economy and lasts more than a few months." This definition is the one that is most commonly used to describe recessions.
Before publicly announcing the end of an economic growth and the beginning of a recession, the committee considers a variety of criteria, and it frequently succeeds in doing so after the fact.
If we aren't already in one, we'll be there shortly, according to Joshua Shapiro, chief U.S. economist for Maria Fiorini Ramirez Inc. "Aggressive monetary tightening mixed with an economy that is fast losing pace is not a recipe for a soft landing or any other kind of pleasant conclusion.
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