For the second consecutive quarter, the U.S. economy shrank in the spring, meeting the criteria for a so-called technical recession, as raging inflation and higher interest rates forced consumers and businesses to pull back on spending. The Commerce Department said in its first reading of the data that in the three-month period from April through June, gross domestic product, the broadest measure of goods and services produced across the economy, shrank by 0.9% on an annualized basis.
Over the first three months of the year, the economic output has fallen over already, with GDP tumbling 1.6%, the worst performance since the spring of 2020 when the economy was still deep in the throes of the COVID-induced recession.
Chief global strategist at Principal Global Investors, Seema Shah said: “Policymakers will no doubt be tying themselves in knots trying to explain why the U.S. economy is not in recession. However, they make a strong point. While two consecutive quarters of negative growth is technically a recession, other timelier economic data are not consistent with recession.”
According to the National Bureau of Economic Research (NBER), which tracks downturns, recessions are technically defined by two consecutive quarters of negative economic growth and are characterized by high unemployment, low or negative GDP growth, falling income and slowing retail sales.
The economy meets the technical criteria for a recession, with back-to-back declines in growth, which requires a “significant decline in economic activity that is spread across the economy and that lasts more than a few months.” Still, the semi-official arbiter, the NBER, may not confirm it immediately as it typically waits up to a year to call it.
Also, the NBER stressed that it relies on more data than GDP in determining whether there is a recession, such as unemployment and consumer spending, which remained strong in the first six months of the year. The depth of any decline in economic activity is also taken into consideration.
The nonprofit said on its website: “Thus, real GDP could decline by relatively small amounts in two consecutive quarters without warranting the determination that a peak had occurred.”
The committee does not meet regularly, only when members decide it is warranted.
A number of factors are the reason for the latest downturn, such as declines in private inventories, residential and nonresidential investment, and government spending at the federal, state and local levels. In net exports, which is the difference between what the U.S. exports and what it imports, those decreases were offset by increases, as well as consumer spending, which accounts for two-thirds of GDP.
Consumers are spending far less than they were in the winter, with personal consumption expenditures climbing by just 1% for the period as high inflation persisted and eroded Americans’ purchasing power, the report showed.
For President Biden, the report will fuel a growing political crisis. The President has seen his approval rating collapse in conjunction with a faltering economy and could complicate the Federal Reserve’s policy trajectory as it weighs how quickly to raise interest rates in order to tame inflation without crushing economic growth.
In June and July for the first time since 1994, Central bank policymakers raised the benchmark interest rate by 75 basis points. They signaled that, depending on forthcoming economic data, another increase of that magnitude is possible in September.
Fed Chairman Jerome Powell said: “I do not think the U.S. is currently in a recession, and the reason is there are too many areas of the economy that are performing too well. This is a very strong labor market. … It doesn’t make sense that the economy would be in a recession with this kind of thing happening.”
Notice: This article may contain commentary that reflects the author's opinion.
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