The American economy shrank at a slightly slower pace in the second quarter than previously reported, but continued to meet the criteria for a so-called technical recession as raging inflation and higher interest rates weighed on spending.
Gross domestic product, the broadest measure of goods and services produced across the economy, shrank 0.6% year-on-year in the second quarter, the Commerce Department said in its second reading of the data on Thursday. That is below the originally reported decline of 0.9%.
GDP already fell by 1[ads1].6% in the January-March period, the worst performance since spring 2020, when the economy was deep in the COVID-induced recession.
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, according to the National Bureau of Economic Research (NBER), which tracks recessions.
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With back-to-back declines in growth, the economy faces technical criteria for a recession, which calls for a “significant slowdown in economic activity that is spread across the economy and that lasts more than a few months.” Still, the NBER — the semi-official arbitrator — may not confirm it immediately, as it usually waits up to a year to make the call.
The NBER has also emphasized that it relies on more data than GDP to determine whether there is a recession, such as unemployment and consumer spending, which remained strong in the first six months of the year. It also takes into account the depth of any slowdown in economic activity.
“Therefore, real GDP could decline by relatively small amounts for two consecutive quarters without warranting a determination that a peak had occurred,” the nonprofit said on its website.
The committee does not meet regularly, only when the members decide that it is justified.
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The latest decline stems from a variety of factors, including declines in private inventories, residential and occupational investment, and government spending at the federal, state, and local levels. These declines were offset by increases in net exports—the difference between what the U.S. exports and what it imports—as well as consumer spending, which accounts for two-thirds of GDP.
The report showed that consumers are spending far less than they did in the winter, with personal consumption expenditures rising just 1% during the period when high inflation persisted and eroded Americans’ purchasing power.
The report will fuel a growing political crisis for President Biden, who has seen his approval ratings collapse amid a faltering economy, and could complicate the Federal Reserve’s policy path as it weighs how quickly to raise interest rates to tame inflation without crushing the economy growth.
Central bank policymakers raised the benchmark interest rate by 75 basis points in June and July for the first time since 1994. They signaled that another increase of that magnitude is possible in September, depending on upcoming economic data.
Fed Chairman Jerome Powell told reporters last month that he does not believe the US economy is in a recession.
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“I don’t think the United States is in a recession at the moment, and the reason is that there are too many areas of the economy that are performing too well,” Powell said. “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 going on.
This is a developing story. Please check back for updates.