The fall in US GDP comes after the Federal Reserve raised interest rates as Chairman Jerome Powell says growth needs to slow.
By Reade PickertBloomberg
Posted on July 28, 2022 July 28, 2022
The U.S. economy shrank for a second straight quarter, raising the prospect of a recession, as decades-high inflation dampened consumer spending and Federal Reserve interest rate hikes slowed business investment and housing demand.
Gross domestic product fell at an annualized rate of 0.9 percent after a 1.6 percent decline in the first three months of the year, the Commerce Department’s preliminary estimate showed Thursday. Personal consumption, the largest part of the economy, rose at a pace of 1%, a slowdown from the previous period.
The median projection in a Bloomberg survey of economists called for a 0.4 percent advance in GDP and a 1.2 percent increase in consumer spending.
Two-year Treasury yields fell after the report reduced the chances of further aggressive rate hikes by the Fed, while U.S. stock futures remained lower and the dollar erased gains.
Details in the report showed declines in business and government spending and residential investment. Inventories also weighed on GDP.
A key measure of underlying demand that strips out the components of trade and inventories (inflation-adjusted final sales to domestic buyers) fell at a 0.3% pace in the second quarter compared with a 2% gain in the period previous
The report illustrates how inflation has eroded Americans’ purchasing power and the Federal Reserve’s tighter monetary policy has weakened interest rate-sensitive sectors such as housing. This weakness is likely to throw fuel into an already heated debate about whether or when the US will enter a recession.
While the common rule of thumb for recessions is two consecutive quarterly declines in GDP, the official determination of the ends and starts of business cycles is made by a group of academics at the National Bureau of Economic Research.
Profit forecasts
Stores like Walmart Inc. and Target Corp. have cut their profit forecasts and a host of tech companies, including Shopify Inc., have announced plans in recent weeks to cut jobs. Others, such as Apple Inc. and Microsoft Corp., are slowing hiring.
Broader weakness in a labor market that shows only limited signs of cooling would remove a key source of support for the economy and help shape the course of monetary policy later this year.
“We think it is necessary for growth to slow down,” Fed Chairman Jerome Powell said at a press conference on Wednesday after another 75 basis point hike in interest rates. “We actually think we need a period of below-potential growth in order to create some slack for supply to catch up. We also think there will, in all likelihood, be some softening of market conditions labor market”.
–With the assistance of Kristy Scheuble and Olivia Rockeman.