The US economy has contracted for a second straight quarter, sounding the alarm over a possible recession as the nation grapples with soaring inflation and rising interest rates.
Top economists don’t believe a downturn has begun but some predict a mild one is likely by early next year.
Residential investment plunged last quarter as the housing market slumped amid sharply rising mortgage rates while business stockpiling and investment declined also, more than offsetting a modest advance in consumer spending.
The nation’s gross domestic product, the value of all goods and services produced in the US, shrank at a seasonally adjusted annual rate of 0.9% in the April-June period, the Commerce Department said Thursday. That followed a 1.6% drop early this year. Economists surveyed by Bloomberg had forecast a 0.5% rise in GDP.
The second straight quarterly decline in output meets an informal threshold for recession but not the criteria relied on by the National Bureau of Economic Research. The non-profit group defines a recession as a significant decline in a broad range of economic activity, including employment, retail sales and industrial production.
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Employers added a robust 372,000 jobs in June and an average 457,000 a month so far this year, making it unlikely a downturn is already underway, economists say, though payroll gains have slowed from a blockbuster 2021.
Last year, as COVID vaccinations increased and business reopened more fully from pandemic-induced shutdowns, the economy grew 5.7%, the most since 1984.
“Economic growth slowed in the first half of 2022, but the US economy is not in recession,” says Gus Faucher, chief economist of PNC Financial Services Group.
Yet there’s little doubt the economy is shifting into a lower gear and entering a perilous period. Inflation hit a 40-year high of 9.1% in June and the Federal Reserve is trying to combat the price surge by aggressively raising interest rates in a campaign that could trigger a recession.
Goldman Sachs sees a 30% chance of a downturn over the next year while Wells Fargo predicts a mild recession in early 2023.
In the second quarter, inflation-adjusted domestic final sales, which strips out volatile categories such as inventories and trade, fell 0.3% following a 2% rise the first three months of the year. In other words, consumers and business spending – the economy’s engine – is losing some steam.
Economists expect growth of 2% this year and 1.1% in 2023, according to a survey by Wolters Kluwer Blue Chip Economic Indicators.
The chief culprit in the second quarter contraction was a sharp pullback in business stockpiling. Companies added to inventories more slowly or drew them down, shaving growth by more 2 percentage points.
Companies bulked up their stocks excessively last year to grapple with longstanding supply chain bottlenecks and product shortages. Many retailers now have too much product and are expected to offer shoppers big discounts to unload the goods.
Meanwhile, housing construction and renovation tumbled 14% following a 0.4% gain the previous quarter.
Fed rate hikes have propelled mortgage rates higher, pummeling home sales and building. Fixed, 30-year mortgage rates have jumped to an average of 5.54% from 3.22% early this year.
How other parts of the economy fared:
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Consumer spending rises modestly
Americans are pulling back as spikes in gas, food and rent costs forcing them to limit discretionary purchases but they still displayed resilience. Consumer spending, which makes up 70% of economic activity, grew 1% after adjusting for inflation following a 1.8% rise late last year.
Despite the budget squeeze, households continue to be bolstered by strong job growth and more than $2 trillion in savings amassed during the pandemic. And as COVID fears wane, consumers continue to shift their spending from goods to summer travel and other services.
But the cushion is thinning. By comparison, outlays emerged at a double-digit pace in early 2021 when the economy was reopening and federal stimulus checks juiced purchases.
Business investment dips
Business investment edged down 0.1% after a 10% gain the prior quarter. Recession worries are prompting many companies to hunker down and reduce spending.
Outlays for computers, delivery trucks, factory machines and other equipment fell 2.7%.
Spending on buildings, oil rigs and other structures dropped 11.7%, the fifth straight quarterly decline. Intellectual property investments partly offset the retreat, rising 9.2%.
Trade bolsters GDP, for a change
After serving as a significant drag on growth early this year, trade was a big positive last quarter.
Exports surged 18% as US manufacturers benefited from easing supply snarls.
Meanwhile, imports rose just 3.1% as consumers who have splurged on TVs, sofas, appliances and other goods during the pandemic began to pull back.
The combination of soaring exports and fewer imports narrowed the trade deficit, boosting overall growth.
Government spending falls again
Government outlays declined for the third straight quarter. Federal spending dropped 3.2% and state and local purchases slipped 1.2%.