U.S. economy shrank in 2nd quarter, fueling recession fears

The government’s announcement on Thursday that the U.S. economy had two straight quarters of no growth sparked fresh fears of an impending recession, but for most Americans, there’s good news. mixed with evil.

That’s because the slowing economy signals that the Federal Reserve’s campaign to rein in inflation by raising interest rates, along with other developments here and abroad, may be starting. effective head.

And while economic downturns often bring higher unemployment rates, a much larger number of workers and families suffer from inflation.

Also, there’s good reason to think that any recession-related layoffs won’t be as bad this time around, especially if the downturn is relatively mild and short-lived, like most economists predict.

What’s more, many Americans will enter any recession with higher-than-normal savings, and the labor market remains strong, despite mass layoffs across the country. Thursday’s economic report showed earnings rose and the savings rate remained steady at 5.2% in the second quarter.

The official designation of a recession is given by a special group of experts, who consider several other factors besides quarterly growth, including employment, income, spending and industrial production. Their decision won’t come for several months, perhaps longer if the data is clouded.

But Republicans took no time in re-establishing allegations that President Biden and other Democrats mismanaged the economy, pointing to a common definition of a recession. was two consecutive quarters without any growth in gross domestic product.

“Since President Biden took office and the Democrats took control of Congress, we’ve been in an all-out economic predicament,” said Senator Steve Daines (R-Mont.)

Such criticism, and the White House’s staunch denial that the economy is in recession, are sure to continue in the months leading up to the midterm elections that will determine which party controls Congress. .

Beneath the political rhetoric, there is some truth to both sides’ claims. Most economists are predicting a moderate recession at some point.

But while recessions are rarely seen as positive, they are a regular feature of the US economy, with a recession occurring on average every six and a half years since 1945.

What complicates things this time is the fact that inflation has exploded at its fastest rate in decades.

A moderate recession that raises the unemployment rate by a percentage point or two from the current 3.6% is likely to cost about 3 million high-end jobs.

But the US workforce is about 160 million people, so only a fraction will be at risk of unemployment.

On the other hand, inflation and rising prices hurt all but the wealthiest members of society.

Federal Reserve Chairman Jerome H. Powell said so on Wednesday as he announced another major interest rate hike and signaled more to come as the central bank tries to reverse already creeping inflation. to a four-decade high of 9.1% in June.

Even if the Fed’s tightening of financial conditions plunges the economy into recession, causing unemployment to rise and other financial hardships for some, Powell said reducing inflation would be a win-win. a plus point for everyone because it is an important prerequisite for stable and sustainable growth.

“Price stability is really the foundation of the economy,” he said. “Nothing in the economy works – the economy doesn’t work for anyone without price stability.”

Powell said he doesn’t think the economy is currently in recession, especially given the robust labor market.

“You know, 2.7 million people [were] rent in the first half of the year. It doesn’t mean the economy will go into recession with things like this happening, he said.

And with nearly two job openings for every unemployed person, Powell thinks the job loss may not be as large as it was during the previous recession. “This time might be different,” he said.

For now, based on Thursday’s report from the Commerce Department, the economy appears to be sliding. Consumer spending, which accounts for more than two-thirds of US economic activity, slowed but increased modestly in the second quarter. People spend less on furniture and clothing, but more on hotels, restaurants and other services.

If not for companies stockpiling fewer goods, but in part for continued supply constraints, the economy would have seen a small positive in the spring quarter.

However, the impact of the Fed raising interest rates and high inflation is clearly making them suffer. The data reflects “a notable deceleration in economic activity in the real economy due to weakening domestic demand and the combined effects of an energy shock, inflation and exchange rate appreciation”, Joseph Brusuelas, chief economist at accounting firm RSM.

Thursday’s report showed that the nation’s GDP, the broadest measure of economic activity, shrank at an annualized rate of 0.9% in the second quarter, dragging on less inventory build-up but also due to declines in housing and other business investment and government spending.

That comes after a 1.9% drop in the first three months of the year.

Last year, GDP grew at a particularly rapid rate of 5.7%, the fastest since 1984, as the economy recovered from a brief pandemic-induced slump.

Most economists agree that there is yet to be a significant drop in broad-based economic activity that would mark a full-fledged recession.

The Biden administration has repelled Republican attacks on its handling of the economy, but the ruling party, and especially the president, traditionally shoulder the political responsibility.

In addition to the political and academic debates among economists, the reality is that the US economy is still grappling with the shocks caused by the COVID-19 pandemic.

And if forecasters are right and the recession is mild — and inflation tame — for a long time, that will do more good than bad for most people.