Economic system

U.S. economy shrinks for snap second quarter, raising fears of a recession

The U.S. economy contracted from April to June for a snap second quarter, contracting at an annual rate of 0.9% and raising fears that the country is also on the verge of a recession.

The Commerce Department’s Thursday decline in gross domestic product — the broadest measure of the economy — followed a 1.6% annual decline from January through March. Consecutive quarters of declining GDP are an occasional, though no longer definitive, indicator of a recession.

The document comes at an important time. Consumers and businesses had suffered under the burden of punishing inflation and better borrowing prices. The Federal Reserve on Wednesday raised its benchmark interest rate by about three-quarters to some extent for the second time instantly in its effort to triumph over the worst inflation spike in four years.

The Fed hopes to achieve a notoriously difficult “soft landing”: a financial slowdown that manages to contain soaring costs without triggering a recession.

Fed Chairman Jerome Powell and many economists have said that while the economic system appears to be weakening, they doubt it is in recession. Many of them are, in particular, in a still-robust tough labor market, with 11 million process openings and an unusually low unemployment rate of 3.6%, to mean that a recession, if it happens, still stay away .

On Thursday, the first of three government estimates of GDP for the April-June quarter marks a drastic weakening from the 5.7% expansion the economy achieved last year. It was the fastest growth over a calendar year since 1984, reflecting the strength with which the economy roared after the temporary but brutal pandemic recession of 2020.

But since then, the combination of rising costs and better borrowing prices has taken its toll. The Labor Department’s Customer Value Index soared 9.1% in June from 12 months earlier, a pace not matched since 1981. And despite routine wage increases, costs are rising faster than wages. In June, average hourly earnings, after adjusting for inflation, slipped 3.6% from a year earlier, the fifteenth instant year-over-year decline.

Soaring inflation and fear of a recession have eroded customer confidence and sparked public nervousness about the economic system, which is sending frustrating and mixed alerts. And ahead of November’s midterm elections, American discontent has reduced President Joe Biden’s public approval scores and increased the possibility that Democrats will lose control of the House and Senate.

Consumer spending continues to rise. But Americans are losing confidence: their review of monetary preconditions in six months has fallen to its lowest level since 2013, according to the Conference Board, an analysis team.

Recession risks have increased because Fed policymakers have continued a campaign of rate hikes that could most likely extend into 2023. Fed hikes have already led to higher rates on bank cards and auto loans and a doubling of typical rates on a 30 year secured loan up to now 12 months, at five.5. Home sales, which can be particularly sensitive to interest rate adjustments, fell.

Even with the economic system instantly recording an unfavorable 2nd quarter of GDP, many economists do not consider it to constitute a recession. The definition of recession that is most generally accepted is the only one given to us by the National Bureau of Economic Research, a group of economists whose Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that spreads through the economy and lasts for more than a few months.

The committee assesses various things before publicly signaling the death of financial growth and the onset of a recession – and it always does so smartly after the truth.

This week, Walmart, the nation’s largest store, slashed its earnings outlook, saying higher gas and meal prices were forcing consumers to spend far less on many discretionary items, like new clothes.

Manufacturing is also slowing down. US factories have seen 25 consecutive months of growth, according to the Institute for Supply Management’s production index, despite supply chain bottlenecks making it difficult for factories to meet orders.

But now, manufacturing unit growth is emerging as pressure indicators. The ISM index fell last month to its lowest level in two years. New orders fell. Factory hiring fell for a second month instantly.