America’s GDP fell at a 0.9% annualized rate in the second quarter, a preliminary estimate from the Bureau of Economic Analysis showed Thursday morning.
The report marks the second straight quarter of declining inflation-adjusted GDP — a situation commonly used to define a recession. GDP tumbled at a 1.6% rate in the first quarter.
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Thursday’s numbers indicate that the economy has been struggling to stay above water during the historic monetary policy tightening cycle by the Federal Reserve, which is trying to lower soaring inflation. Residential investment cratered, a sign of the housing market slowing as mortgage rates rise. Consumer spending on goods also turned negative.
“We doubt the economy is in a recession given the labor market strength. But the reported softening in domestic demand confirms the economy is rapidly downshifting amid stubbornly-high inflation and aggressive Fed tightening,” said economists with Oxford Economics. “The economy is battling headwinds of high inflation, aggressive Fed tightening, financial market volatility, and weakening global demand.”
While the coronavirus pandemic was the biggest factor in GDP growth over the past couple of years, the bigger problem facing the economy now is inflation and the Fed’s plan to tamp it down by raising interest rates.
The Biden administration had been working to preempt the Thursday report, fearing it would turn out to be in the red. The White House released a blog post asserting that two consecutive quarters of negative growth doesn’t necessarily indicate the country is in a recession.
Government officials, economists, and many others use recession designations provided by the National Bureau of Economic Research, a private academic group. The bureau doesn’t provide a concrete definition. Rather, it relies on the judgment of a group of economists.
The group broadly defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
Republicans blamed Biden Thursday morning for causing a recession.
“Democrats can’t solve the massive economic challenges our nation is facing because they won’t even admit there’s a problem to begin with,” said Calvin Moore, the communications director for the Congressional Leadership Fund, a super PAC that backs House Republicans. “Families need relief, but Democrats’ only solution is doubling down on the same failed policies that got us here in the first place.”
Since last summer, inflation has accelerated to crippling levels not seen in 40 years. Inflation, as gauged by the consumer price index, clocked in at a blistering 9.1% in the 12 months ending in June — a number that was higher than expected.
On Wednesday, following a two-day meeting, the Federal Open Market Committee announced it would increase its interest rate target by three-quarters of a percentage point. The central bank typically raises rates by just a quarter of a percentage point, so the move was akin to three simultaneous rate hikes and speaks to the desperation of officials who want to bring prices down.
One positive aspect of the economy, which has provided a cushion for the Fed’s tightening, is the strong labor market.
The economy beat expectations and added 372,000 jobs in June, more than was expected. The unemployment rate also remained at 3.6% in June, matching the low level it was at right before the pandemic struck.
A day before the new GDP numbers were released, Fed Chairman Jerome Powell said he doesn’t believe the economy of the United States is in a recession.
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“I do not think the U.S. is currently in a recession,” Powell told reporters Wednesday. “And the reason is there are just too many areas of the economy that are performing too well.”
Powell pointed to the tight labor market as one factor in his argument. He said that while it is evident that growth is slowing, the jobs market has remained robust.
