Recession fears as US GDP shrinks for 2nd consecutive quarter

WASHINGTON, 29 July 2022:

The US economy contracted for a second consecutive quarter as its GDP, or gross domestic product, which measures the price of goods and services, fell at an estimated annual rate of 0.9% between April and June.

The latest report from the Department of Commerce yesterday raises fears of a recession as US GDP shrank by 1.6% in the first quarter of the year.

Back-to-back quarters of GDP decline is often used as a benchmark to indicate that a country has entered into a technical recession, although this stance is not shared by the US government.

The decline comes amid soaring inflation – which rose to 9.1% in June, the highest rate since 1981 – and continued global economic disruption due to Russia’s invasion of Ukraine.

The US Federal Reserve on Wednesday hiked interest rates by 0.75%, to move within a target range of 2.25-2.5%, in a bid to offset inflation.

The Department’s Bureau of Economic Analysis said the “smaller decrease” of GDP from Q1 to Q2 “reflected an upturn in exports and a smaller decrease in federal government spending.”

It added that these data “were partly offset by larger declines in private inventory investment and state and local government spending, a slowdown in PCE (personal consumption expenditure) and downturns in non-residential fixed investment and residential fixed investment.”

President Joe Biden’s administration, which is set for a tough test in the upcoming midterms, as well as the International Monetary Fund and US Fed had spent days preparing for the gloomy figures – insisting there are other economic indicators to confirm the US has not entered a recession.

Jared Bernstein, an economic advisor to Biden, on Wednesday explained an economic recession was a concept beholden to many factors.

He argued that two consecutive quarters of GDP contraction did not necessarily indicate a recession, especially if the declines were small. Bernstein added, however, that he did not want to paint a “too friendly picture” of the situation.

In its global economic outlook, the IMF on Tuesday downgraded its forecast for US economic growth to 3.2% in 2022 and 2.9% in 2023 – a reduction of 0.4% and 0.7% compared to its previous report in April.

Speaking to Bloomberg, IMF chief economist Pierre-Olivier Gourinchas warned a “small shock” could be enough to knock the US into recession next year.