US recession fears grow as the economy contracts for the second quarter

The US economy 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.

Key points:

• Prices of groceries, gasoline and other basic necessities are rising at the fastest pace since 1981
• Job growth averaged 456,700 per month in the first half of the year
• Joe Biden said: “We also see signs of economic progress in the second quarter”

By some definitions, a second consecutive 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 strong consumer spending and business investment.

But contraction, on 0.9 percent annual rate last quarter, attracted widespread attention because of concerns about the growing economy.

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

Prices for groceries, gasoline and other basic necessities rose at their fastest pace since 1981.

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

The US central bank on Wednesday raised its policy rate by three-quarters of a percentage point, bringing its 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 very vulnerable to slipping into a recession,” Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, said.

“That might prevent the Fed from making another big rate hike in September.”

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

But he said it was “consistent with steady steady growth and lower inflation”.

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

Joe Biden held a meeting with CEOs on Thursday.(AP: Susan Walsh)

Job growth is 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, usually seen in production, employment, real income, and other indicators”.

Employment 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 percent.

“There’s no doubt there’s a fundamental decline in domestic demand in evidence here,” Brian Coulton, chief economist at Fitch Ratings in New York, said.

“But this figure does not signal the early arrival of inflation and a recession due to recent Fed tightening that the market is focusing on.”

Soaring inflation and fears of a recession have eroded consumer confidence and raised anxiety about the economy, sending mixed signals that are frustrating.

Stocks on Wall Street traded higher as the dollar edged up against several currencies.(AP: John Minchillo)

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

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

ABC/cable

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