WASHINGTON: The US economy unexpectedly shrank in the second quarter, with business spending falling and consumer spending expanding at its weakest rate in two years. This could fuel concerns in the financial community that the economy is already in a recession.
The second consecutive quarterly decline in gross domestic product, which was reported by the Commerce Department on Thursday, was largely attributable to businesses building up inventory at a more moderate rate due to ongoing car shortages.
US economy shrank
Additionally, because of sluggish consumer spending, retailers are less eager to stock up on supplies. In light of the Federal Reserve’s aggressive tightening of monetary policy and the consecutive declines in GDP, the US central bank may be forced to curtail its sharp increases in interest rates.shrank
Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, stated that “the economy is highly vulnerable to slipping 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 country’s economy shrank at an annualised rate of 0.9 percent last quarter.
GDP was expected to grow by 0.5 percent, according to economists surveyed by Reuters. Estimates ranged 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.
The conventional definition of a recession is when the GDP declines for two consecutive quarters.
Recessions are defined by the National Bureau of Economic Research 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,” according to their definition.shrank
In the first half of the year, job growth averaged 456,700 per month, which is leading to significant wage growth. However, the dangers of a downturn have grown. While business and consumer sentiment have weakened recently, homebuilding and home sales have declined.
US stock prices declined. In relation to a currency basket, the dollar remained stable. Price of US Treasury increased.
Demand plateaus
In an effort to calm voters ahead of the midterm elections on November 8, which will determine whether President Joe Biden’s Democratic Party retains control of the US Congress, the White House is vehemently combating the recession talk.shrank
On Thursday, Janet Yellen, the secretary of the Treasury, will hold a press conference to “discuss the state of the US economy.” Although the labour market is still tight, there are indications that it is waning.
Initial claims for state unemployment benefits dropped by 5,000 to a seasonally adjusted 256,000 for the week ended July 23 according to a separate report released on Thursday by the Labor Department. Reuters polled economists, who predicted 253,000 applications for the most recent week.
The number of new unemployment claims is still below the 270,000 to 350,000 mark, which economists believe would indicate a rise in the unemployment rate. Although much would depend on the trajectory of inflation, which is significantly above the US central bank’s 2 percent target, the Fed may slow the pace of rate increases as the economy struggles.
The Federal Reserve increased its policy rate by another 0.75% on Wednesday, bringing the total increase in interest rates since March to 225 basis points. Jerome Powell, the chair of the Fed, acknowledged the waning economic activity brought on by tighter monetary policy.
Due to record exports in the most recent quarter, the trade deficit dramatically decreased, boosting GDP growth by 1.43 percentage points. Trade had been a drag on growth for seven consecutive quarters before that.shrank
Businesses did continue to rebuild inventory, but at a much slower rate than in the first three months of this year and the fourth quarter of 2021. GDP was reduced by inventories by 2.01 percentage points.
Consumer spending, which makes up more than two thirds of all economic activity in the United States, increased at a rate of 1.0 percent. That was a slowdown from the first quarter’s steady 1.8 percent pace and the slowest since the second quarter of 2020.
Due to inadequate investment in machinery and nonresidential structures, business spending decreased. Additionally, government spending was weak due to a significant decrease in non-defense expenditures.
A gauge of domestic demand that excludes trade, inventories, and government spending remained stable, highlighting the economy’s significant loss of momentum. final sales to domestic consumersshrank
Since the COVID-19 recession two years ago, residential investment has shrunk the most. This is because higher mortgage rates have had a negative impact on both homebuilding but also home sales, which has decreased broker commissions.
