The numbers: The U.S. economy shrank at a annual 0.9% pace in the second quarter to mark the second decline in a row, intensifying a debate over whether the U.S has already sunk into a recession.
Gross domestic product, the scorecard of sorts for the economy, had shrunk at a 1.6% pace in the first three months of the year.
Economists polled by The Wall Street Journal forecast a 0.3% increase in second-quarter GDP. All figures are adjusted for inflation.
The back-to-back declines in GDP were the first since the 2007-2009 Great Recession.
A sharp drop in business investment and declining inventory levels largely accounted for the negative GDP print in the second quarter. Government spending also fell sharply.
The lone bright spot: Consumer spending, the main engine of the economy, rose at a 1% annual clip, but that was the smallest increase since a recovery from the pandemic got underway.
While two straight quarters of declining GDP has been commonly viewed as a recession, the group of prominent economists responsible for declaring official recessions takes a broader view that suggests the old rule of thumb does not always apply.
The definition of recession has become a subject of fierce debate ahead of the U.S. Congressional elections in the fall. The Biden White House has argued the U.S. is not in recession, but Republicans want to pin the blame on Democrats for the slowdown in economic growth.
Big picture: The economy is slowing. Of that there’s no doubt.
The Federal Reserve has jacked up its benchmark U.S. interest rate by 2.5 percentage points since March to try to combat the biggest surge in inflation in almost 41 years. The cost of living rose 9.1% in the 12 months ended in June.
Higher interest rates tend to slow the economy by making it more costly for businesses and consumers to borrow.
Yet few economists think the U.S. is already in a recession. While many believe a downturn is inevitable, they say it will probably won’t start until the end of 2022 or some time in 2023.
Key details:
- Consumer spending rose at a 1% rate in the second quarter, compared to 2.3% average in the 10 years prior to the pandemic. Household purchases account for about 70% of U.S. economic activity.
- Business fixed investment fell at a 3.9% rate — the most since the early stages of the pandemic. Spending on equipment, a good sign of future growth prospects, fell at a 2.7% pace. Builders also slashed investment in new housing.
- The U.S. trade deficit fell after hitting a record high in the first quarter. Imports rose just 3.1% while exports leaped 18%. The record trade gap was largely responsible for the decline in first-quarter GDP.
- The value of inventories shrank by a $106.9 billion and subtracted 2 percentage points from headline GDP. Massive stockpiling at the end of 2021 caused a spike in fourth-quarter GDP and now the process has reversed.
- Government spending sank at a 1.9% clip in the second quarter.
- The rate of inflation rose at an annual 7.1% rate, the highest since 1981.
Looking ahead: “Another drop in GDP will renew declarations that we’re in a recession, but a broader look at the data shows that’s unlikely,” said corporate economist Robert Frick of Navy Federal Credit Union “Hiring and spending are strong, and more Americans are earning paychecks and getting raises given the tight labor market.”
“While two consecutive quarters of negative growth is technically a recession, other timelier economic data are not consistent with recession,” said Seema Shah, chief global strategist at Principal Global Investors.
But “throw in the most aggressive Fed tightening cycle since the 1980s, and a recession in early 2023 is highly likely,” she added.
Market Reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
rose in Thursday trades.
