The US enters a technical recession as GDP falls in the second quarter


The US economy contracted unexpectedly in the second quarter, with consumer spending growing at its slowest pace in two years and business spending falling, which could fuel financial markets’ fears that the economy is already in recession.

The second quarterly contraction in gross domestic product, reported by the Commerce Department on Thursday, largely reflected a more moderate pace of inventory building by companies amid ongoing shortages of motor vehicles.

The slowdown in consumer spending has also left retailers with little appetite to stockpile more inventory. The repeated contraction in GDP amid aggressive monetary tightening by the Federal Reserve could force the US Federal Reserve to reverse its massive rate hikes.

“The economy is very vulnerable to slipping into recession,” said Sal Guatieri, senior economist at BMO Capital Markets in Toronto. “That could prevent the Fed from pushing through another big rate hike in September.”

Gross domestic product fell an annualized 0.9 percent in the most recent quarter, the government said in its forecast of GDP. The economy shrank by 1.6 percent in the first quarter.

The second consecutive quarterly contraction in GDP fits the standard definition of a recession.

But the National Bureau of Economic Research, the official arbiter of recessions in the United States, defines a recession as “a significant decline in economic activity, spread across the economy, lasting more than a few months, and usually in manufacturing, employment , real income, and other indicators”.

Job growth averaged 456,700 per month in the first half of the year, leading to strong wage increases. Nevertheless, the risks of a downturn have increased. Housing construction and home sales have weakened, while business and consumer sentiment have weakened in recent months.

The White House is cracking down on recession chatter to reassure voters ahead of the Nov. 8 midterm elections that will decide whether President Joe Biden’s Democratic Party retains control of the US Congress.

Jobless claims remain below the 270k-350k range, which economists say would signal a rise in the jobless rate. Given the struggling economy, the Fed could slow its pace of rate hikes, although much would depend on the path of inflation, which is well above the Federal Reserve’s 2% target.

The trade deficit narrowed sharply last quarter thanks to record exports, contributing 1.43 percentage points to GDP growth. This ended seven consecutive quarters in which trade held back growth.

While companies continued to build inventories, the pace slowed significantly from the fourth quarter of 2021 and the first three months of this year. Inventories cut 2.01 percentage points of GDP.

Consumer spending, which accounts for more than two-thirds of US economic activity, grew 1.0 percent. That was the slowest since the second quarter of 2020 and down from the moderate pace of 1.8 percent in the first quarter.

Business spending fell, dragged down by weak investment in equipment and non-residential construction. Government spending was also weak, reflecting a sharp decline in non-defense spending.

A measure of domestic demand – excluding trade, inventories and government spending – remained unchanged, underscoring the clear loss of momentum in the economy. Final sales to private domestic buyers account for about 85 percent of total spending and increased 3.0 percent in the first quarter.

Home investment shrank the most since the COVID-19 recession two years ago, as higher mortgage rates weighed on both home construction and home sales, lowering brokerage commissions. The US enters a technical recession as GDP falls in the second quarter

Fry Electronics Team

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