US economy shrinks again, fueling recession fears

US gross domestic product (GDP) contracted again in the second quarter, raising risks of the world’s largest economy slipping into recession, months before a key election for Joe Biden.

The contraction of GDP is 0.9% at an annualized rate, a measure favored by the United States, which compares with the previous quarter and then projects the evolution throughout the year, according to figures released this Thursday by the Department of Commerce.

Weak growth was expected, after a drop, already in the first quarter, of 1.6%.

The commonly accepted definition of a recession is two consecutive quarters of falling GDP. But many economists, as well as the administration of President Joe Biden, say the economy is not in a recession because of other, more favorable indicators, such as employment.

The US economy is “on the right track,” the US president said in a press release on Thursday, judging that “it is not surprising” that “it is slowing down while the Federal Reserve acts to reduce inflation.”

Joe Biden is scheduled to speak on price hikes at 12:00 (16:00 GMT) from the White House.

The US central bank, the Fed, sharply hiked its key rates again on Wednesday to deliberately curb economic activity in order to ease pressure on prices. Inflation reached a new record in June, with an annual 9.1%.

Its president, Jerome Powell, once again assured this Wednesday “that there is a way to lower inflation while supporting a solid labor market”, considering that the US economy “is not in a recession now”, despite “a slowdown in the spent”.

Economy and Finance Minister Janet Yellen will give a press conference at 1:30 p.m. (5:30 p.m. GMT).

– Solid labor market –

The Commerce Department said the drop in GDP in the second quarter reflected declines in business investment and home purchases by households. Governments, both federal and local, also reduced their spending.

Consumption, the engine of US growth, held up, but thanks to spending on services, and in particular on rents, whose prices soared with inflation. Purchases of goods have decreased.

US economy shrinks again, fueling recession fears

The drop in GDP in the quarter is 0.2% if we simply compare it with the previous quarter, the same as other advanced economies.

So, has the United States entered a recession or not? The debate, which had already been going on for several days, will thus be able to resume.

It’s “disappointing but (it) doesn’t mean the economy is in a recession,” notes Andrew Hunter, an economist at Capital Economics, specifying that the drop is also due to unsold inventories, which represent a cost to businesses.

“We doubt that the economy is in a recession given the strength of the labor market,” also believe Lydia Boussour and Kathy Bostjancic, economists at Oxford Economics.

They note, however, that “slowing domestic demand confirms that the economy is slowing rapidly in an environment of stubbornly high inflation and aggressive Fed tightening.”

The unemployment rate, at 3.6%, is very close to its pre-pandemic level, which was the lowest in 50 years, and employers are still struggling to hire.

– “Magnitude of fall” –

Only one body is authorized in the United States to officially determine recession periods, the National Bureau of Economic Research (NBER), but this is several months behind schedule.

US economy shrinks again, fueling recession fears

We “consider a series of indicators,” the NBER details on its site, which also observes “the magnitude of the drop in activity.”

The Biden administration is trying to put out the fire.

“What a recession really means is a generalized contraction of the economy. And even if that number is negative, we’re not in a recession right now,” Janet Yellen said on Sunday.

But the opposition sees it as an attempt to manipulate the numbers. “Exclusive to Joe Biden: You can’t change reality by arguing over definitions,” the GOP responded.

The IMF, for its part, has sharply revised downwards its growth forecast for the United States for 2022, and now only expects 2.3% (when it was still anticipating 3.7% in April), anticipating “lower growth at the beginning of the year.” .

US GDP contracted 3.4% in 2020 as a result of the COVID-19 crisis, before recovering 5.7% in 2021.


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