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The U.S. economy shrank 0.9 percent in the latest quarter, its second straight contraction

WASHINGTON — 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 latest quarter’s GDP report pointed to weakness across the economy. Consumer spending is slowing as Americans buy fewer goods. Business investment fell. Inventories tumbled as businesses slowed to rebuild shelves, cutting 2 percentage points of GDP.

Higher interest rates, the result of the Federal Reserve’s series of interest rate hikes, crushed housing construction, which shrank 14% annually. Government spending also fell.

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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.

Apart from the United States, the global economy as a whole is also struggling with high inflation and slowing growth, especially after Russia’s invasion of Ukraine, which sent energy and food prices soaring. Europe, heavily dependent on Russian natural gas, appears particularly vulnerable to a recession.

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In the United States, surging inflation and fears of a recession have undermined consumer confidence and fueled public anxiety about the economy, which 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.

Fed Chairman Jerome Powell and many economists said that while the economy was showing some slack, they doubted it was in recession. Many point, 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 happens, is still far off.

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“Continued contraction in GDP will fuel the debate about whether the US is in or will soon be headed for a recession,” said Sal Guatieri, senior economist at BMO Capital Markets. “The fact that the economy created 2.7 million payrolls in the first half of the year seems to be against the official call for a recession for now.”

However, Guatieri said, “the economy has rapidly lost steam in the face of four decades of high inflation, rapidly rising borrowing costs and general tightening of financial conditions.”

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. It was the fastest calendar-year expansion since 1984, reflecting how vigorously the economy bounced back from the brief but brutal pandemic recession of 2020.

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But since then, a combination of rising prices and higher borrowing costs has taken its toll. The Labor Department’s consumer price index skyrocketed 9.1 percent in June from a year earlier, a pace not seen since 1981. And despite widespread wage increases, prices rose faster than wages. In June, average hourly earnings, adjusted for inflation, fell 3.6% from a year earlier, the 15th straight annual decline.

Americans are still spending, albeit more coolly. Thursday’s report showed consumer spending rose at a 1 percent annual pace from April to June, down from 1.8 percent in the first quarter and 2.5 percent in the final three months of 2021.

Spending on goods such as appliances and furniture, which jumped as Americans sheltered at home at the start of the pandemic, fell 4.4% in the latest quarter. Small spending on services such as air travel and dining out rose 4.1%, indicating that millions of consumers are venturing out more.

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Before accounting for price increases, the economy actually grew at a 7.8% annual rate in the April-June quarter. But inflation wiped out that gain and then some, and resulted in negative GDP.

Against this background, Americans are losing confidence. Their assessment of economic conditions six months out is at its lowest point since 2013, according to the Conference Board, a research group.

Recession risks are rising as Fed policymakers pursue a rate hike campaign 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 interest rate on Age 30 year fixed mortgage in the past year, up 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 a 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 longer than for several months.”

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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.

Copyright 2022 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or distributed without permission.

The U.S. economy shrank 0.9 percent in the latest quarter, its second straight contraction

Source link The U.S. economy shrank 0.9 percent in the latest quarter, its second straight contraction

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