US teeters on the brink of recession as GDP shrinks in Q2

  • GDP for the second quarter fell 0.9%
  • Inventories are responsible for a significant drop in GDP
  • slowdown in consumer spending; commercial investment contracts
  • Weekly jobless claims drop from 5,000 to 256,000

WASHINGTON (Reuters) – The U.S. economy unexpectedly contracted in the second quarter, with consumer spending growing at the slowest pace in two years and business spending falling, raising the risk that the economy is on the cusp of a recession.

While the second consecutive quarterly drop in gross domestic product reported by the Commerce Department on Thursday largely reflects a more moderate pace of inventory build-up by businesses due to the ongoing shortage of cars, the economic situation has been subdued, with exports being the only bright spot.

This may deter the Federal Reserve from continuing to aggressively raise interest rates while battling high inflation. The US central bank on Wednesday raised its policy rate by another three-quarters of a percentage point, bringing the total rate hike since March to 225 basis points.

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“The economy is very vulnerable to slipping into a recession,” said Sal Gutierre, chief economist at BMO Capital Markets in Toronto. “That may discourage the Fed from raising rates again in September.”

The government said in its advance estimate of gross domestic product that gross domestic product fell at an annual rate of 0.9 percent in the fourth quarter.

Economists polled by Reuters had expected gross domestic product to rebound by 0.5%. Estimates ranged from a low deflation rate of 2.1% to a high growth rate of 2.0%. The economy contracted at a pace of 1.6% in the first quarter.

It shrank 1.3 percent in the first half, which meets the definition of “technical stagnation.” But economists, the Federal Reserve and the White House say the economy is not in a recession based on broader measures of activity. Read more

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 through the economy, lasting for more than a few months, and typically visible in production, employment, real income, and other indicators.”

Job growth averaged 456,700 per month in the first half of the year, while domestic demand continued to grow.

“There is undoubtedly a fundamental slowdown in domestic demand coming here,” said Brian Colton, chief economist at Fitch Ratings in New York. “But this number does not indicate the early arrival of the inflation and stagnation caused by the Fed tightening of the recession that markets have focused on recently.”

The White House sought to placate voters before November 11. 8 Congressional elections will decide whether President Joe Biden’s Democratic Party will retain control of the US Congress.

Treasury Secretary Janet Yellen described the administration’s achievements over the past 18 months, including strong employment gains after record job losses at the height of the COVID-19 pandemic, and called the economy “resilient.” However, Yellen acknowledged that activity is slowing and warned of many risks on the horizon. Read more

“This report points to an economy transitioning to more consistent sustainable growth,” Yellen said at a press conference.

Stocks on Wall Street were trading higher. The dollar rose against a basket of currencies. US Treasury yields fell.

Considerable uncertainty

There is a great deal of uncertainty surrounding the outlook for the second half of the year, with housing and manufacturing data slipping.

Business and consumer sentiment has been souring, while inflation is hurting sales at retailers such as Walmart (WMT.N), which said earlier this week it needed more price cuts to reduce inventories.

The job market remains tight, although there are signs that it is losing steam. A separate report from the Labor Department on Thursday showed that initial claims for state unemployment benefits fell 5,000 to a seasonally adjusted 256,000 for the week ending July 23. It came after three consecutive weekly increases, which pushed claims to an eight-month high of 261,000.

The number of people receiving benefits after an initial week of aid dropped 25,000 to 1.359 million during the week ending July 16. The so-called continuing claims, a proxy for employment, are not too far from levels last seen in late 1969. This indicates that July was another month of strong job gains.

While companies continued to rebuild inventory last quarter, the pace of that slowed significantly from what was seen in the fourth quarter of 2021 and the first three months of this year.

Inventories cut 2.01 percentage points from GDP. That offset a 1.43 percentage point lift from a narrower trade deficit, thanks to record exports, which have ended seven consecutive quarters in which trade has dragged growth.

Consumer spending, which accounts for more than two-thirds of US economic activity, grew at a rate of 1.0%. The slowest pace since the second quarter of 2020 was reflected in lower purchases of goods, especially food, due to higher prices.

The broader measure of inflation rose at a rate of 8.2%, the fastest since 1981, and up from a first-quarter pace of 8.0%. Income at the disposal of households adjusted for inflation declined at a pace of 0.5% after declining at a rate of 7.8%.

Savings fell to $968.4 billion from $1.02 trillion in the first quarter.

Consumers also cut back on recreational goods, vehicles, as well as furniture. But they have been frequenting restaurants and bars and staying in hotels more, underlining the shift in spending again on services as Americans learn to live with COVID-19. Consumer spending grew at an average rate of 1.8% in the first quarter.

Business spending has shrunk, due to weak investment in equipment and non-residential structures. The release of 72.3 million barrels of crude oil from the Strategic Petroleum Reserve to curb rising gasoline prices weighed on non-defense government spending. Total government spending declined for the third consecutive quarter.

The measure of domestic demand is unchanged – excluding trade, inventories and government spending. Final sales to private domestic buyers account for about 85% of total spending and increased at an average of 3.0% in the first quarter.

Residential investment has shrunk the most since the pandemic recession two years ago as rising mortgage rates hit home sales, cutting brokers’ commissions.

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(Reporting by Lucia Mutikani) Editing by Chizu Nomiyama, Andrea Ricci and Paul Simao

Our Standards: Thomson Reuters Trust Principles.

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