The U.S. economy shrank from April to June for a second straight quarter, shrinking at a 0.9 percent annual rate and raising concerns that the nation may be heading into recession.
The drop the Commerce Department reported Thursday in gross domestic product — the broadest gauge of the economy — followed an annual decline of 1.6 percent from January to March. Consecutive quarters of GDP declines are an unofficial, though not definitive, indicator of a recession.
The report comes at a critical time. Consumers and businesses are struggling under the weight of punishing inflation and higher borrowing costs. The Federal Reserve on Wednesday raised its benchmark interest rate by a significant three-quarters of a point for the second time in a row as it seeks to tackle the worst inflation in four decades.
The Federal Reserve is hoping to achieve a somewhat difficult “soft landing”: an economic slowdown that manages to contain skyrocketing prices without triggering a recession.
Fed Chairman Jerome Powell and many economists said that while the economy was showing some slack, they doubted it was in recession. Many pointed in particular to the still-stable labor market, with 11 million job openings and an unusually low unemployment rate of 3.6 percent, suggesting that a recession, if it does occur, is still far off.
WATCH | Why June’s jobs numbers have some economists worried about a recession:
June’s job losses stoke worries about a recession
Canada reported its first job losses since January, raising fears of a looming recession even with a growing economy.
The first of three government estimates of GDP for the April-June quarter on Thursday marked a sharp slowdown from the 5.7 percent growth the economy achieved last year. That was it the fastest increase for a calendar year since 1984reflecting how vigorously the economy bounced back from the brief but brutal pandemic recession of 2020.
But since then, a combination of rising prices and higher borrowing costs has taken its toll. Ministry of Labor the consumer price index skyrocketed 9.1% in June from a year earlier, rates not reached since 1981. And despite widespread wage increases, prices are rising faster than wages. In June, average hourly earnings, adjusted for inflation, fell 3.6% from a year earlier, the 15th straight annual decline.
Uncertain times
Rising inflation and fears of a recession have undermined consumer confidence and fueled public anxiety about an economy that is sending disappointingly mixed signals. And with November’s midterm elections approaching, American discontent has eroded President Joe Biden’s public approval rating 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 assessment of economic conditions has hit its lowest point since 2013, according to the Conference Board, a research group.
Recession risks are rising as Fed policymakers wage a campaign to raise interest rates that is likely to last through 2023. The Fed’s hikes have already led to higher interest rates on credit cards and auto loans and a doubling of the average rate on a 30-year fixed mortgage in the past year to 5.5. Home sales, which are particularly sensitive to changes in interest rates, collapsed.
Even if the economy registers a second straight quarter of negative GDP, many economists do not think this constitutes a recession. The most widely accepted definition of recession is that defined by the National Bureau of Economic Research, a group of economists whose Business Cycle Review Committee defines a recession as “a significant decline in economic activity that spreads throughout the economy and lasts more than a few months.”
The committee evaluates a range of factors before publicly declaring the death of an economic expansion and the birth of a recession — and often does so after the fact.
Walmart, the nation’s largest retailer, cut its profit outlook this week, saying higher gas and food prices are forcing shoppers to spend less on many discretionary items, such as new clothing.
Production is also slowing down. U.S. factories enjoyed 25 straight months of expansion, according to the Institute for Supply Management’s manufacturing index, even as supply chain bottlenecks made it difficult for factories to fill orders.
But now the factory boom is showing signs of strain. The ISM index fell last month to its lowest level in two years. New orders are declined. Factory hiring fell for the second month in a row.
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