The US economy contracted again in the past 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, declined at an annual rate of 0.9 percent in the second quarter after falling to an annual rate of 1.6% in the first three months. .
The bad news will be a big blow to 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 is in marked contrast to the robust annual GDP increase of 6.9% recorded in the last quarter of 2021, when the economy recovered from the Covid shutdowns.
The rapid pace of growth contributed to rising inflation, now at 40-year highs, and the Federal Reserve’s decision to sharply raise interest rates to lower prices.
The changing economic environment was reflected in the GDP report. Consumer spending, the main driver of the economy, slowed during the quarter but remained positive, rising 1% annually. Residential fixed investment, or home construction, fell 14% annually and the slowdown in business inventories, goods produced but not yet sold by businesses, dragged down the GDP figure.
Two-quarters of negative GDP growth is widely seen as a sign that the economy has entered recession. But the National Bureau of Economic Research (NBER) is the official arbiter of when recessions start and end. While GDP numbers will play into the NBER’s final verdict, it also looks at a broader range of economic factors, including the labor market, and is unlikely to make its decision anytime soon.
“The 0.9% annualized drop in GDP in the second quarter is disappointing, but it 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 rising inflation are weighing on underlying demand, and we expect only a muted pick-up in economic growth in the second half of the year.”
Meanwhile, pressure continues on the Biden administration. Consumer confidence polls are declining as recession fears grow, and Joe Biden’s global and economic approval poll numbers are currently at the lowest levels of his presidency.
In a statement, Biden said that “it is no surprise that the economy is slowing as the Federal Reserve acts to reduce inflation. But while we face historic global challenges, we are on the right track and will get through this transition more strong and safe.”
Republicans countered that the report shows that “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 control inflation.
Prices rose at an annual rate of 9.1% in the year to June, driven by higher costs of fuel, food and housing.
While parts of the US economy remain strong, notably the labor market, the Covid pandemic continues to wreak havoc on global supplies and the war in Ukraine has pushed up energy prices.
The confused economic outlook has sparked a sell-off in stock markets around the world and led some economists to predict a recession. Almost 70% of leading academic economists polled by the Financial Times last month predicted the US economy will enter recession next year.
Fed Chairman Jerome Powell said Wednesday that he did not believe the United States was currently in a recession. But he said the Fed was prepared to keep raising rates to push prices back down and it was inevitable that such a move would slow the economy and hurt the labor market. “Price stability is what makes the whole economy work,” Powell said.