The likelihood that a recession was imminent increased when the U.S. economy unexpectedly shrank in the second quarter, with business spending falling and consumer spending expanding at its weakest rate in two years.
Even though the second consecutive quarterly decline in gross domestic product reported by the Commerce Department on Thursday largely reflected a more moderate pace of business inventory accumulation due to ongoing shortages of motor vehicles, the economic profile was weak, with exports being the only bright spot.
This might discourage the Federal Reserve from escalating its rate increases as it fights high inflation. The policy rate was increased by the U.S. central bank by another three-quarter of a percentage point on Wednesday, bringing the total number of rate increases since March to 225 basis points.
Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, stated that “the economy is quite vulnerable to falling into a recession.” “That might deter the Fed from imposing another significant rate hike in September.”
According to the government’s preliminary estimate of GDP, the economy shrank at an annualized pace of 0.9 percent last quarter.
GDP was expected to grow by 0.5 percent, according to economists surveyed by SoSoProf Global. Estimates varied from a contraction rate of 2.1 percent to a growth rate of 2.0 percent. The first quarter saw a 1.6 percent rate of economic contraction.
In the first half, it shrank by 1.3 percent, meeting the criteria for a “technical recession.” But according to analysts, using broader gauges of activity, the economy is not in a recession.
A recession is defined 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” by the National Bureau of Economic Research, the official arbiter of recessions in the United States.
In the first half of the year, job growth averaged 456,700 per month while domestic demand grew steadily.
The senior economist of Fitch Ratings in New York, Brian Coulton, declared that “there is without a doubt an underlying downturn in domestic demand in evidence here.” But despite recent market attention, this number does not portend an early start to the recession caused by inflation and Fed tightening.
In an effort to soothe Americans ahead of the Nov. 8 midterm elections that will determine whether President Joe Biden’s Democratic Party maintains control of the U.S. Congress, the White House is vehemently combating the recession talk. On Thursday, Janet Yellen, the secretary of the Treasury, will attend a press conference to “address the status of the U.S. economy.”
Wall Street stocks increased. In comparison to a currency basket, the dollar grew marginally. Treasury prices increased.
IMPORTANT UNCERTAINTY
The picture for the second half of the year is surrounded by a great deal of uncertainty as a result of deteriorating manufacturing and housing indicators. The state of the economy and consumer confidence has deteriorated, and inflation is harming sales at companies like Walmart.
Although there are indications that it is losing momentum, the labor market is still tight. Initial claims for state unemployment benefits fell by 5,000 to a seasonally adjusted 256,000 for the week ended July 23 according to a separate report released by the Labor Department on Thursday. That came after three consecutive weekly gains that had brought claims to an eight-month high of 261,000.
During the week ending July 16, the number of people getting benefits after the first week of assistance decreased by 25,000 to 1.359 million. The so-called continuing claims, which serve as a stand-in for hiring, have not strayed far from their lows of late 1969. This implies that July was another month with significant job growth.
The pace of inventory rebuilding by firms last quarter dropped considerably compared to that of the fourth quarter of 2021 and the first three months of this year.
GDP was reduced by inventories by 2.01 percentage points. This offset an increase in growth of 1.43 percentage points brought on by a reduced trade deficit as a result of record exports, which halted a streak of seven consecutive quarters in which trade slowed GDP.
Consumer expenditure, which makes up more than two-thirds of all economic activity in the United States, increased at a rate of 1.0 percent. The smallest growth rate since the second quarter of 2020 was caused by decreases in consumer spending, mainly on food due to rising costs.
A more comprehensive gauge of inflation increased at an accelerated rate of 8.2 percent compared to the first quarter’s 8.0 percent. Household income that has been adjusted for inflation decreased by 0.5 percent after falling by 7.8 percent in the previous quarter.
Savings decreased from $1.02 trillion in the first quarter to a still high of $968.4 billion.
Due to inadequate investment in machinery and nonresidential structures, business spending decreased. Government non-defense spending was affected by the release of 72.3 million barrels of crude oil from the Strategic Petroleum Reserve to cut gasoline prices. Spending by the government as a whole fell for the third consecutive quarter.
A gauge of domestic demand that excludes trade, inventories, and government expenditure remained stable, highlighting the economy’s considerable loss of momentum. Approximately 85% of total spending is made up of final sales to domestic consumers, which rose at a 3.0% annual pace in the first quarter.
Due to increasing mortgage rates’ impact on home sales and consequent decline in broker compensation, residential investment shrank to its lowest level since the COVID-19 crisis two years ago.
