WASHINGTON: The US economy contracted again in the second quarter amid aggressive monetary policy tightening from the Federal Reserve to combat high inflation, which could fan financial market fears that the economy was already in recession.
Gross domestic product fell at a 0.9% annualized rate last quarter, the commerce department said in its advance estimate of GDP on Thursday. Economists polled by Reuters had forecast GDP rebounding at a 0.5% rate.
The median projection in a Bloomberg survey of economists called for a 0.4% advance in GDP and a 1.2% rise in consumer spending.
The report will add to political headaches for President Joe Biden and complicate the Fed’s calculus over how aggressively to raise interest rates.
The report illustrates how inflation has undercut Americans’ purchasing power and tighter Federal Reserve monetary policy has weakened interest rate-sensitive sectors such as housing. That weakness is likely to throw fuel on an already heated debate about if or when the US enters a recession.
While the common rule of thumb for recessions is two consecutive quarterly declines in GDP, the official determination of ends and beginnings of business cycles is made by a group of academics at the National Bureau of Economic Research.
In addition to the slowdown in household spending, the report also showed declines in business investment, government outlays and housing. Inventories also weighed on GDP, while a narrower trade deficit added to the figure.
A key gauge of underlying demand that strips out the trade and inventories components — inflation-adjusted final sales to domestic purchasers — fell at a 0.3% pace in the second quarter compared with a 2% gain in the prior period.
Though Biden says he is confident the US economy is not suffering a downturn, his critics are sure to seize on the report as proof of the veteran Democrat’s mismanagement of the economy.
After a 1.6 percent decline in the first three months of the year, the report noted drops in government spending at all levels and private investment on goods, including autos, and on residential buildings fell in the second quarter, despite an increase in exports.
The US economy also continues to battle sky-high inflation, as a result of supply chain snarls due to Covid lockdowns, as well as Russia’s war in Ukraine which has sent prices of food and fuel soaring.
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