The fall in US GDP comes on the heels of the Federal Reserve raising interest rates, as Chair Jerome Powell says growth needs to slow.
Published On 28 Jul 2022
The US economy shrank for a second straight quarter, raising chances of a recession, as decades-high inflation undercut consumer spending and Federal Reserve interest-rate hikes stymied business investment and housing demand.
Gross domestic product fell at a 0.9% annualized rate after a 1.6% decline in the first three months of the year, the Commerce Department’s preliminary estimate showed Thursday. Personal consumption, the biggest part of the economy, rose at a 1% pace, a deceleration from the prior period.
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.
Two-year Treasury yields tumbled after the report reduced chances of further aggressive Fed rate increases, while US stock futures remained lower and the dollar erased gains.
The details of the report showed decreases in business and government spending and residential investment. Inventories also weighed on GDP.
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.
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.
Retailers like Walmart Inc. and Target Corp. have slashed their profit forecasts, and a slew of tech companies, including Shopify Inc., have announced plans in recent weeks to cut workers. Others, like Apple Inc. and Microsoft Corp. are slowing hiring.
Broader weakness in a labor market that’s shown only limited signs of cooling would remove a key source of support for the economy and help shape the course of monetary policy later this year.
“We think it’s necessary to have growth slow down,” Fed Chair Jerome Powell said at a news conference Wednesday after another 75 basis-point hike in interest rates. “We actually think we need a period of growth below potential in order to create some slack so that the supply side can catch up. We also think that there will be, in all likelihood, some softening in labor market conditions.”
–With assistance from Kristy Scheuble and Olivia Rockeman.