A key measure of economic output fell for the second straight quarter, raising fears that the United States could enter a recession – or perhaps it had already started.
Gross domestic product, adjusted for inflation, fell 0.2% in the second quarter, the Commerce Department said Thursday. The decline follows a 0.4% drop in the first quarter. Estimates for both periods will be revised in the coming months as government statisticians obtain more complete data.
News of the back-to-back contractions intensified debate in Washington over whether a recession had begun and, if so, whether President Biden was to blame. Economists largely say that conditions do not meet the formal definition of a recession, but the risks of a recession are increasing.
For most people, however, a label of “recession” matters less than economic reality: growth is slowing, businesses are shrinking, and families are finding it harder to keep up with rapidly rising prices.
“We are absolutely losing momentum,” said Tim Quinlan, senior economist at Wells Fargo. “Minimum income gains have struggled to keep pace with inflation, and that’s what’s reducing people’s ability to spend.”
A deceleration, in itself, is not necessarily bad news. The Federal Reserve has tried to cool the economy in a bid to keep inflation under control, and the White House argued the slowdown was part of an inevitable and necessary transition to sustainable growth after the year’s rapid recovery last.
“After last year’s historic economic growth – and the recovery of all the private sector jobs lost during the pandemic crisis – it is not surprising that the economy is slowing as the Federal Reserve acts to reduce inflation. “, Mr. Biden said in a statement released after the release of the GDP report. “But even though we face historic global challenges, we are on the right path and will come through this transition stronger and safer.”
Still, forecasters in recent weeks have become increasingly concerned that the Fed’s aggressive moves — including raising interest rates by three-quarters of a percentage point on Wednesday for the second consecutive month — will lead to a recession. Fed Chairman Jerome H. Powell acknowledged that the path to avoid a slowdown is “narrowing,” in part due to global forces, including the war in Ukraine and China’s tough pandemic policies, which are beyond the control of the central bank.
“When you’re skating on thin ice you wonder what it would take to push you through, and we’re on thin ice right now,” said Diane Swonk, chief economist at KPMG.
Matthew Martin, 32, pays more for the butter and eggs that go into the intricately decorated sugar cookies he sells through a home-based business. At the same time, its sales are falling.
“I guess people don’t have that much money to throw at cookies right now,” he said.
Mr. Martin, a single father of two, tries to cut his expenses, but it’s not easy. He’s replaced going to the movies with day hikes, but that means spending more on gas. He hopes to sell his house and move somewhere cheaper, but finding a home he can afford has proven difficult, especially as mortgage rates have risen. He thought about getting a typical 9-to-5 job to pay the bills, but then he would have to pay for childcare for his 4-year-old twins.
“Honestly, I’m not 100% sure what I’m going to do,” he said.
When GDP fell in the first three months of the year, some dismissed the decline as a fluke, the result of quirks in the way the government accounts for spending and investment. Underlying demand measures remained strong and many economists thought it was likely that first-quarter data would eventually be revised to show a modest gain.
The decline in the second quarter, although more moderate, is more difficult to rule out. Home building fell sharply, business investment stagnated and after-tax income, adjusted for inflation, fell. Consumer spending, the foundation of the economy, grew, albeit at its slowest pace since the early months of the pandemic.
“The second quarter is really closer to the definition of a real downturn,” said Gary Schlossberg, global strategist at the Wells Fargo Investment Institute. “What we’ve seen in this quarter is an outright decline in domestic spending.”
Economists often use two quarters of declining GDP as a shorthand definition of a recession. In some countries, this is the formal definition. But in the United States, declaring a recession falls to a private, nonprofit research organization, the National Bureau of Economic Research. The group defines a recession as “a significant drop in economic activity that extends throughout the economy and lasts for more than a few months”, and it bases its decisions on a variety of indicators – usually a few months. only after the fact.
Some forecasters believe a recession can be avoided if inflation cools enough that the Fed can slow interest rate hikes before they weigh too heavily on hiring and spending.
The economy still has significant strengths. Job growth has remained robust and, despite a recent increase in unemployment insurance claims, there are few signs of a general increase in job losses. Households, as a whole, are sitting on trillions of dollars in savings accumulated earlier in the pandemic, which could allow them to cope with higher prices and interest rates.
“What drives the American consumer is the health of the job market, and we really should be focused on job growth to capture the turn of this economic cycle,” said Blerina Uruci, economist at T. Rowe Price. The Labor Department will release July hiring and unemployment data next week.
The lingering effects of the pandemic are making signals from the economy harder to interpret. Americans bought fewer cars, sofas and other goods in the second quarter, but forecasters had long expected spending on goods to decline as consumers returned to pre-pandemic spending habits. Indeed, economists argue that a pullback in spending on goods is needed to relieve pressure on overstretched supply chains.
At the same time, spending on services accelerated. This could be a sign of consumer resilience in the face of skyrocketing air fares and car rental prices. Or it could just reflect a temporary willingness to bear high prices, which will fade with the summer sun.
“There’s going to be this element of, ‘We haven’t had a summer vacation in three years, so we’re going to take one no matter how much it costs,'” said Aditya Bhave, senior economist for Bank of India. America. “The question is what happens after the summer.”
Avital Ungar attempts to interpret conflicting signals in real time. Ms. Ungar operates a small business organizing food tours for tourists and corporate groups in San Francisco, Los Angeles and New York.
When restaurants closed and travel ceased at the start of the pandemic, Ms Ungar had no income. She has succeeded by offering virtual happy hours and online cooking classes. When in-person visits returned, business was spotty, changing with each new coronavirus variant. Ms Ungar said demand remained difficult to predict as prices rose and the economy slowed.
“We are in two different kinds of uncertainty,” she said. “There was the pandemic-related uncertainty, and then there’s the economic uncertainty right now.”
In response, Ms Ungar focused on high-end circuits, which she says will hold up better than those aimed at more price-sensitive customers. And she’s trying to avoid long-term commitments that could be difficult to meet if demand cools.
“Every annual plan I’ve done in the last three years hasn’t turned out this way,” she said. “It’s really important to recognize that what worked yesterday won’t work tomorrow.”
Lydia DePillis contributed report.