US economy shrinks again for 2nd quarter in a row

The report comes at a critical time, just as the Fed hiked rates again by a massive 0.75%.

WASHINGTON — The U.S. economy contracted for the second straight quarter from April to June, contracting at an annual rate of 0.9% and stoking fears the nation could be nearing a recession.

The decline the Commerce Department reported Thursday in gross domestic product — the economy’s broadest measure — followed a 1.6% annual decline from January to March. Consecutive quarters of falling GDP are an informal, though not definitive, indicator of a recession.

The report comes at a critical time. Consumers and businesses face the penalty of inflation and higher borrowing costs. On Wednesday, the Federal Reserve raised interest rates by a substantial three-quarters point for the second straight month in a bid to weather the worst inflationary spurt in four decades.

The Fed is hoping for a notoriously difficult “soft landing”: an economic slowdown that manages to rein in skyrocketing prices without triggering a recession.

Fed Chair Jerome Powell and many economists have said that while the economy is showing some moderation, they doubt it is in recession. In particular, many of them point to a still-resilient job market, with 11 million job vacancies and an unusually low unemployment rate of 3.6%, suggesting that a recession, if it happens, is still a long way off.

The first of three government GDP estimates released Thursday for the April-June quarter marks a sharp slowdown in economic growth from 5.7% last year. That was the fastest expansion in a calendar year since 1984, reflecting how powerfully the economy has roared back from the short 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 rose 9.1% year-on-year in June, a pace not seen since 1981. And despite widespread wage increases, prices are rising faster than wages. In June, inflation-adjusted average hourly wages fell 3.6% year-on-year, the 15th consecutive year-on-year decline.

The surge in inflation and fears of a recession have shaken consumer confidence and raised public concern about the economy, which is sending out frustratingly mixed signals. And with the midterm elections approaching in November, American discontent has lowered President Joe Biden’s public approval ratings and increased the likelihood that Democrats will lose control of the House and Senate.

Consumer spending continues to rise. But Americans are losing confidence: their six-month view of the economy has hit its lowest level since 2013, according to the Conference Board, a research group.

Recession risks have increased as Fed policymakers have embarked on a campaign of rate hikes that will likely extend into 2023. The Fed’s rate hikes have already resulted in higher rates on credit cards and car loans and a doubling of the year fixed-rate mortgage over the past year to 5/5. Home sales, which are particularly sensitive to changes in interest rates, have plummeted.

Even with the economy posting negative GDP for the second straight quarter, many economists don’t see a recession. The most widely accepted definition of a recession is that of 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 extends across the economy and lasts longer than a few.” Months.”

The committee assesses a number of factors before publicly declaring the death of an economic expansion and the birth of a recession – and often does so well in hindsight.

This week, Walmart, the country’s largest retailer, cut its earnings outlook and said higher gasoline and grocery prices are forcing shoppers to spend less on many essential items, like new clothes.

Production is also slowing down. America’s factories have expanded for 25 straight months, according to the Institute for Supply Management’s Manufacturing Index, even though 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 to its lowest level in two years last month. New orders declined. Factory hiring fell for the second straight month. US economy shrinks again for 2nd quarter in a row

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