United States recession fears grow as economy contracts for second quarter

The United States economy has unexpectedly contracted in the second quarter, with consumer spending growing at its slowest pace in two years and business spending declining, raising speculation the economy is on the cusp of a recession.

By some definitions, a second-straight quarterly decline in gross domestic product (GDP) would be considered a “technical recession”.

US President Joe Biden dismissed talk of a recession, however, pointing to a “historically strong” job market along with robust consumer spending and business investment.

But the contraction, at an annualized rate of 0.9 per cent last quarter, drew widespread attention as worries about the economy grew.

It could deter the Federal Reserve from continuing to aggressively increase interest rates as it battles high inflation rates, which hit 9.1 per cent in June.

Prices for groceries, petrol and other basics increased at their fastest pace since 1981.

US inflation hit 9.1 per cent in June.(AP: Andres Kudacki)

The US central bank on Wednesday raised its policy rate by another three-quarters of a percentage point, bringing the total rate hikes since March to 225 basis points.

Increasing borrowing costs reduces spending on large purchases such as homes and cars, easing some of the pressures that fuel inflation. But lower demand also means a decline in economic activity.

“The economy is highly vulnerable to slipping into a recession,” Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, said.

“That might discourage the Fed from ramming through another large rate hike in September.”

During a meeting with CEOs on Thursday, Mr Biden said there was “no doubt we expect growth to be slower than last year”.

But he said that was “consistent with a stable steady growth and lower inflation”.

“If you look at our job market, consumer spending, business investment, we see signs of economic progress in the second quarter, as well,” he said.

President Joe Biden speaks about the economy as a large screen shows other speakers.
Joe Biden held a meeting with CEOs on Thursday.(AP: Susan Walsh)

Job growth a positive sign

The National Bureau of Economic Research, the official arbiter of recessions in the United States, defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators”.

Job growth averaged 456,700 per month in the first half of the year, while domestic demand continued to grow.

Unemployment remained low at 3.6 per cent.

“There is without doubt an underlying slowdown in domestic demand in evidence here,” Brian Coulton, chief economist at Fitch Ratings in New York, said.

“But this number does not signal the early arrival of the inflation and Fed-tightening induced recession that markets have recently been focused on.”

The inflation surge and fear of a recession have eroded consumer confidence and stirred anxiety about the economy, which is sending frustratingly mixed signals.

Screens display end-of-day trading results at the New York Stock Exchange.
Stocks on Wall Street were trading higher as the dollar edged up against some currencies.(AP: John Minchillo)

Stocks on Wall Street were trading higher. The dollar edged up against a basket of currencies. US Treasury yields fell.

There was considerable uncertainty surrounding the outlook for the second half of the year, with housing and manufacturing data softening.

ABC/wires

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