The US entered a technical recession following the economy’s contraction in the second quarter, with consumer spending growing at its slowest pace in two years and business spending declining.
The second straight quarterly decline in gross domestic product reported by the Commerce Department on Thursday largely reflected a more moderate pace of inventory accumulation by businesses because of ongoing shortages of motor vehicles.
Slowing consumer spending has also left retailers with little appetite to accumulate more stock. The back-to-back decline in GDP against the backdrop of aggressive monetary policy tightening by the Federal Reserve could force the US central bank to scale back its massive interest rate increases.
“The economy is highly vulnerable to slipping into a recession,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “That might discourage the Fed from ramming through another large rate hike in September.”
Gross domestic product fell at a 0.9 pct annualised rate last quarter, the government said in its advance estimate of GDP.
Economists polled by Reuters had forecast GDP rebounding at a 0.5 pct rate. Estimates ranged from as low as a 2.1 pct rate of contraction to as high as a 2.0 pct growth pace. The economy contracted at a 1.6 pct pace in the first quarter.
The second straight quarterly decline in GDP means that by definition the US has entered a recession.
But the National Bureau of Economic Research, the official arbiter of recessions in the United States defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators.”
“We’re on the right path”
The White House is vigorously pushing back against discussion of recession as it seeks to win votes ahead of the November 8 midterm elections that will decide whether President Joe Biden’s Democratic Party retains control of the US Congress.
The White House released a statement on Thursday saying, “even as we face historic global challenges, we are on the right path”.
Indeed there is some glimmer of light, as job growth averaged 456,700 per month in the first half of the year, which is generating strong wage gains. However, the risks of a downturn have increased. Homebuilding and house sales have weakened while business and consumer sentiment have softened in recent months.