WASHINGTON — The U.S. economy shrank from April to June for the second straight quarter, shrinking at an annual rate of 0.9 percent and raising fears that the nation was heading for a recession.
The decline the Commerce Department reported Thursday in gross domestic product, the broadest gauge of the economy, followed a 1.6 percent annual decline from January to March. Consecutive quarters of falling GDP are an informal, though not definitive, indicator of a recession.
The GDP report for the last quarter pointed to the weakness of the economy. Consumer spending slowed as Americans bought fewer goods. Business investment fell. Inventories fell as companies slowed their restocking, shedding 2 percentage points of GDP.
Higher interest rates, a result of the Federal Reserve’s series of rate hikes, weighed on homebuilding, which fell to an annual rate of 14%. Public spending also fell.
The report comes at a critical time. Consumers and businesses have been struggling under the weight of punishing inflation and higher borrowing costs. On Wednesday, the Fed raised its benchmark interest rate by three-quarters of a point for the second consecutive time in its push to conquer the worst outbreak of inflation in four decades.
The Fed hopes to achieve a notoriously difficult “soft landing” — an economic slowdown that manages to curb skyrocketing prices without triggering a recession.
Apart from the United States, the global economy as a whole is also struggling with high inflation and weakened growth, especially after Russia’s invasion of Ukraine sent energy and food prices soaring. Europe, heavily dependent on Russian natural gas, appears particularly vulnerable to a recession.
In the United States, rising inflation and fears of a recession have eroded consumer confidence and fueled public anxiety about the economy, which is sending frustratingly mixed signals. And with November’s midterm elections approaching, Americans’ discontent has lowered President Joe Biden’s public approval ratings and increased the likelihood that Democrats will lose control of the House and Senate.
Fed Chairman Jerome Powell and many economists have said that while the economy is weakening, they doubt it is in recession. Many of them point, in particular, to a still-robust labor market, with 11 million job openings and an unusually low 3.6% unemployment rate, to suggest that a recession, if it occurs, is still far.
“Continued contraction in GDP will fuel the debate about whether the U.S. is in recession or headed soon for one,” said Sal Guatieri, senior economist at BMO Capital Markets. “The fact that the economy created 2.7 billion euros. Payrolls for the first half of the year seem to argue against an official call for recession for now.”
Still, Guatieri said, “the economy has rapidly lost steam in the face of four-decade high inflation, rapidly rising borrowing costs and a general tightening of financial conditions.”
Thursday’s first of three government GDP estimates for the April-June quarter marks a sharp weakening from the 5.7% growth the economy achieved last year. This was the fastest calendar-year expansion since 1984, reflecting how strongly the economy rebounded from the brief but brutal pandemic recession of 2020.
But since then, the combination of rising prices and higher borrowing costs have taken their toll. The Labor Department’s consumer price index soared 9.1% in June from a year earlier, a pace not matched since 1981. And despite widespread wage gains, prices are rising faster than wages. In June, average hourly earnings, after adjusting for inflation, fell 3.6% from a year earlier, the 15th consecutive year-over-year decline.
Americans are still spending, albeit more tepidly. Thursday’s report showed consumer spending rose at an annual rate of 1% from April to June, down from 1.8% in the first quarter and 2.5% in the last three months of 2021.
Spending on goods such as appliances and furniture, which had soared as Americans holed up at home early in the pandemic, fell to a 4.4% rate last quarter. Spending on services such as air travel and dining increased at a rate of 4.1%, indicating that millions of consumers are venturing out more.
Before taking into account rising prices, the economy grew at an annual rate of 7.8% in the April-June quarter. But inflation wiped out that gain and then some and produced a negative GDP.
In this context, Americans are losing confidence. Their assessment of economic conditions six months from now has hit its lowest point since 2013, according to the Conference Board, a research group.
Recession risks have been growing as Fed policymakers have pursued a campaign of rate hikes that will likely extend into 2023. The Fed’s hikes have already led to higher rates on credit cards and car loans and to double the average rate on a 30- year fixed mortgage in the last year, to 5.5. Home sales, which are particularly sensitive to changes in interest rates, have fallen.
Although the economy posted a second consecutive quarter of negative GDP, many economists do not consider this to constitute a recession. The most widely accepted definition of a recession is that determined by the National Bureau of Economic Research, a group of economists The Business Cycle Quotations Committee defines a recession as “a significant decline in economic activity that extends throughout the economy and lasts longer. more than a few months.”
The committee evaluates a number of factors before publicly declaring the death of an economic expansion and the birth of a recession, often long after the fact.
Walmart, the nation’s largest retailer, cut its profit outlook this week, saying higher gas and food prices were forcing shoppers to spend less on many discretionary items, such as new clothes.
Manufacturing is also slowing. US factories have enjoyed 25 straight months of expansion, according to the Institute for Supply Management’s manufacturing index, even as supply chain bottlenecks have made it difficult for factories to fill orders .
But now, the factory boom is showing signs of strain. The ISM index fell last month to its lowest level in two years. New orders declined. Factory hiring fell for the second consecutive month.