US enters technical recession after contraction in second-quarter growth

The US economy fell into a technical recession in the second quarter, with data published by the commerce department on Thursday showing a contraction in the second three months of the year.

Gross domestic product fell by 0.9 per cent on an annualised basis in the second quarter, or a 0.2 per cent fall from the previous quarter — the measure used by other major economies. That comes in the wake of first-quarter gross domestic product data showing the US economy shrank by 1.6 per cent.

Despite the contraction, personal consumption, which offers insight into the health of the US consumer, grew by 1 per cent, a slowdown compared with 1.8 per cent in the first quarter, but still evidence of strength.

The second quarter data was led by weaker business inventory growth. Several retailers have reported their inventories grew unusually rapidly last year, as they restocked their shelves after Covid-19-related supply-chain bottlenecks eased.

A technical recession is defined as two consecutive quarters of GDP contraction. However, the US does not use this definition and instead relies on a determination by a group of researchers at the National Bureau of Economic Research, based on a broader range of factors.

Nevertheless, two quarters of negative growth in a row could spook markets. Stock market futures were lower and the two-year Treasury yield, which moves with interest rate expectations, plunged.

The figures come the day after the Federal Reserve raised interest rates by 0.75 percentage points as part of an aggressive campaign to rein in inflation. The hefty rate increases implemented by the central bank in recent months have to slow the economy, and market participants are watching closely to see if this rapid tightening will tip the US into recession begun.

The data are unlikely to change the Fed’s calculus for now, economists say. In his press conference after Wednesday’s policy meeting, chair Jay Powell said he did not believe the US was in a recession and pointed to strength in the economy, including in the labor market.

Evidence of a slowdown has yet to appear in US employment data, which is also used by economists to gauge whether a country is in recession. Unemployment is steady at 3.6 per cent, the lowest it has been since before the coronavirus pandemic.

“GDP is one measure of economic activity, but as complete as it may seem . . . the labor market is going to be the best gauge as to whether we’re really headed towards a recession and whether businesses are really cutting back on hiring,” said Gregory Daco, an economist at EY-Parthenon.

“I don’t think the GDP print would or should influence the Fed,” said Eric Winograd, an economist at AllianceBernstein.

The Atlanta Fed’s GDPNow forecast, a dynamic estimate of real GDP growth based on the most current economic data, had forecast a contraction of 1.2 per cent.

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