The US economy contracted for a second straight quarter, meeting one of the common criteria for a technical recession and complicating the Federal Reserve’s push to curb rising inflation with a series of aggressive rate hikes.
Data released by the Commerce Department on Thursday showed gross domestic product fell an annualized 0.9 percent in the second quarter, or a 0.2 percent drop from the previous quarter. This follows first-quarter GDP data showing the US economy contracted 1.6% in the first three months of 2022.
Consecutive quarterly contractions meet one definition of a recession, although the US is based on a determination by a group of researchers at the National Bureau of Economic Research who look at a wider range of factors.
The White House has maintained that the US economy is not currently in recession, with Treasury Secretary Janet Yellen saying earlier this week that she “would be surprised” if the NBER said so.
He underscored that message at a press conference on Thursday, stressing that the economy “remains resilient.”
“Most economists and most Americans have a similar definition of a recession: substantial job losses and mass layoffs, business closings, private sector activity slowing considerably, family budgets under immense strain. In short , a widespread weakening of our economy,” he said. “That’s not what we’re seeing right now.”
However, two consecutive quarters of negative growth will increase pressure on President Joe Biden, who faces low approval ratings and has repeatedly touted a strong economy as one of his administration’s biggest achievements.
Shortly after the data was released, Biden said, “It’s no surprise that the economy is slowing as the Federal Reserve moves to reduce inflation.
“But even as we face historic global challenges, we are on the right track and will come through this transition stronger and more confident. Our job market remains historically strong.”
At a press conference on Wednesday after the Fed raised interest rates by 0.75 percentage points for the second month in a row, Chairman Jay Powell said he did not believe the US was in recession. He pointed to the strength of the economy, including the labor market, but noted that growth should slow and the labor market needs to cool to control inflation.
The labor market has yet to show significant signs of weakness, with the US adding jobs at a healthy pace, averaging around 380,000 per month over the past three months. The unemployment rate also remains historically low at 3.6 percent, just below its pre-coronavirus pandemic level.
“No one would look at two-quarters of the United States with 3.6 percent unemployment and call that a recession,” said Claudia Sahm, founder of Sahm Consulting and a former Fed economist. “We are not in a recession in the true sense of the word, which is a sustained broad-based contraction of economic activity.”
The fallout from the GDP data hit debt markets. The two-year Treasury yield, which moves with interest rate expectations, slumped, suggesting investors were betting the Fed might have to slow its pace of interest rate hikes. The 10-year yield, which moves with expectations for growth and inflation, fell to its lowest level since April.
Despite the drop in overall GDP, personal consumption, which provides insight into the health of the American consumer, grew 1 percent in the second quarter, compared with 1.8 percent growth in the first three months of the year.
The biggest drag on GDP in the second quarter was the drop in business inventories, which knocked 2 percentage points off the overall figure.
Some economists believe it was a lingering effect of last year’s pandemic economy when business inventories rose as shelves were restocked after supply chain bottlenecks related to Covid-19 began to ease. But the slowdown also reflected the dampening impact the Fed’s interest rate hikes have had on business investment, economists said.
“Inventory data has been very volatile over the past two years. Inventory management has been very difficult, partly because of the supply chain problem and partly because the demand for goods was in the red,” said Brian Smedley, an economist at Guggenheim Partners.
Sharp rate hikes by the central bank in recent months have begun to slow the economy, and market participants are watching closely to see if this rapid tightening will push the US into an official recession.
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This has been evident in the housing market. GDP data shows residential investment fell 14 percent in the second quarter, just as higher interest rates began to push up mortgage rates. The new increases will pose additional challenges for the housing sector.
Economists said the data was unlikely to change the Fed’s calculus on the way forward for policy.
“I don’t think the GDP print will or should influence the Fed,” said AllianceBernstein economist Eric Winograd.