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GDP report shows US economy shrank further in second quarter

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The U.S. economy shrank again for a second straight quarter, at an annual rate of 0.9%, raising fears the country is heading into a recession and compounding the Biden administration’s policy challenges as it has struggled with high inflation for decades.

The new figures, released Thursday by the Bureau of Economic Analysis, come at a tumultuous time for the economy, although economists disagree on the likelihood of a full-blown collapse. In the past, six months of contraction usually indicated a recession. The official determination is made by a separate group of experts, although recessions are not typical when unemployment is near its lowest level.

The slowdown in the second quarter reflects changing consumer and business behavior. Retailers bought fewer items, including cars, as consumers shifted spending from goods to services such as restaurants and hotels. Declines in housing construction and government spending also contributed to the negative reading.

The sour gross domestic product report reflects ongoing problems with inflation, which has hit 40-year highs for several months, as well as weakening home sales and challenges for some business sectors, including the technology and finance. Even the hot job market is starting to show cracks. Wider concerns about the war in Ukraine, the global financial outlook and aggressive interest rate hikes have prompted many economists to predict a recession next year.

“Overall, it shows an economy that’s really slowing down,” said Jason Furman, an economics professor at Harvard University who was a top economic adviser to President Barack Obama. “It’s not just about volatile factors anymore. Significant and important parts of the economy are slowing down.

The White House has brushed off concerns about a possible slowdown, with senior officials pointing to a strong labor market as a sign that the recovery remains on track.

“After last year’s historic economic growth … it’s no surprise the economy is slowing as the Federal Reserve acts to reduce inflation,” President Biden said in a statement Thursday. “But even though we face historic global challenges, we are on the right path and will come through this transition stronger and safer.”

Republican lawmakers were quick to blame the Biden administration’s stimulus spending for contributing to inflation and the broader economic contraction.

“You don’t need a fancy economics degree to have seen this coming,” Rep. Kevin Hern (Okla.) said in a statement Thursday. “Biden’s spending over the past 18 months is directly responsible for the economic situation we find ourselves in today.”

The US economy unexpectedly slowed by an annualized 1.6% in the first three months of the year, largely due to a trade mismatch – the US imports far more than they weren’t exporting – and a drop in inventory purchases by companies that were still filled with leftovers from the holidays.

In many ways, the economy is in uncharted territory. The only time there has been six months of contraction without a recession appears to have been in 1947, according to Tara Sinclair, an economics professor at George Washington University.

Some of the signs of slowing economic growth are intentional, thanks to interest rate hikes aimed at cooling the economy. The Federal Reserve raised interest rates again on Wednesday, this time by three-quarters of a percentage point – an unusually aggressive hike – in hopes of reining in inflation, which rose 9.1% on the year last.

The Fed’s interest rate hikes, which began in March, are already starting to cool demand in parts of the economy. On Wednesday, Fed Chairman Jerome H. Powell pointed to a number of data points — including slower consumer spending growth, weaker housing demand and lower business investment — as signs that the central bank’s efforts are bearing fruit.

Fed hikes rates by three-quarters of a percentage point to fight inflation

But, he added, it is becoming increasingly difficult to calm the economy without sending it into a tailspin.

“Our goal is to get inflation down and have a so-called soft landing, by which I mean a landing that doesn’t require a significant increase in unemployment,” Powell told a news conference. Wednesday. “We understand that it is going to be quite difficult. It has become more difficult in recent months.

Inflation explained: how prices took off

Still, most economists expect the U.S. economy to end the year with growth — albeit at a much slower pace than the 5.7% gain it posted last year. . Lydia Boussour, chief US economist at Oxford Economics, for example, expects economic growth to slow to 1.9% this year and 1.1% in 2023.

“We expect the economy to slow down quite sharply,” she said. “The key question is: what happens in the second half and where does that leave the economy?”

The Biden administration’s precautionary retreat on the “recession”

The GDP report showed that Americans are spending less on goods, especially items like clothing, food and household items. However, spending on services, such as travel and restaurants, increased slightly in the second quarter.

Businesses and households, already struggling to cope with soaring prices, say looming economic uncertainty has made it difficult to make long-term plans. Some families are postponing major purchases, while employers say they are rethinking their hiring plans and preparing for a broader drop in spending.

Walmart this week slashed its full-year profit forecast, sending its stock price down nearly 9%. The nation’s largest retailer, seen as a bellwether for the industry, said it will have to mark down products more heavily than expected as rising gas and grocery costs force many consumers to rethink their buying habits.

General Motors, meanwhile, reported a 40% drop in quarterly profits and announced plans to limit hiring. Other major employers, including Ford Motor, 7-Eleven and Shopify, go even further, announcing hundreds, if not thousands, of layoffs.

The labor market is starting to show cracks

These job losses, or simply the impending fear of such a loss, could cause Americans to tighten their belts, further slowing the economy.

Los Angeles comic book publisher Amanda Meadows was unexpectedly fired this month. She’s not worried yet — her partner still has a well-paying job in the video game industry and she hopes to find work soon — but that hasn’t stopped her from rethinking her spending habits.

“All the frivolous stuff — my restaurant budget, my clothes budget, my book budget — it’s all been drastically reduced,” Meadows, 36, said. “If it’s better to leave the money in savings, that’s what we do. . ”

Mark Beneke, owner of a used car dealership in Fresno, Calif., is starting to see ominous signs in the economy: demand for cars is starting to slow and auto loan delinquencies and foreclosures are on the rise.

But he says he’s not panicking yet. Beneke is still hiring new staff, although he says he could cut his marketing budget and start buying fewer cars – perhaps 12 a week instead of 15 – if the crisis continues.

“We’re cautious, but we’re not necessarily scared to the point of freezing,” said Beneke of Westland Auto Sales. “Things don’t seem too worrying yet.”

Aaron Blake contributed to this report.

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