The Commerce Department said on Thursday that gross domestic product (GDP) – a broad measure of the price of goods and services – fell at an annual rate of 0.9% in the second quarter after falling at an annual rate of 1.6% in the first three months . The bad news will be a major blow to the Biden administration as it prepares for a difficult midterm election season. White House officials have tried to play down talk of a recession, arguing that many parts of the economy remain strong. The pace of growth is in sharp contrast to the strong annual GDP growth of 6.9% recorded in the last quarter of 2021, when the economy was roared by the Covid shutdowns. The rapid pace of growth has contributed to soaring inflation – now running at 40-year highs – and the Federal Reserve’s decision to raise interest rates sharply to lower prices. The changing economic environment was reflected in the GDP report. Consumer spending – the biggest driver of the economy – slowed during the quarter but remained positive, rising 1% year-on-year. Residential fixed investment, or home construction, fell 14% year over year and a slowdown in business inventories, the goods produced but not yet sold by businesses, dragged down the GDP number. Two quarters of negative GDP growth is widely seen as a signal that the economy has entered a recession. But the National Bureau of Economic Research (NBER) is the official arbiter of when recessions begin and end. While GDP data will play into the NBER’s final verdict, it also looks at a broader range of economic factors, including the labor market, and is unlikely to rule soon. “The 0.9 percent annual GDP decline in the second quarter is disappointing, but it does not mean the economy is in recession,” said Andrew Hunter, senior U.S. economist at Capital Economics. “That said, the details show that higher rates and rising inflation are weighing on underlying demand and we expect only a modest recovery in economic growth in the second half of the year.” Meanwhile, the pressure remains on the Biden administration. Consumer confidence surveys are falling as recession fears grow and Joe Biden’s economic approval numbers and polls are currently at the lowest levels of his presidency. In a statement, Biden said it was “not surprising that the economy is slowing as the Federal Reserve acts to reduce inflation. But even as we face historic global challenges, we are on the right track and will come through this transition stronger and safer.” Republicans countered that the report shows that “Democrats’ reckless economic policies are destroying our economy.” The latest GDP data came a day after the Fed announced another three-quarters of a percentage point hike in benchmark interest rates as it struggles to tame inflation. Prices rose at an annual rate of 9.1% in the year to June, driven by rising costs for fuel, food and housing. While parts of the US economy remain strong – notably the labor market – the Covid pandemic continues to wreak havoc on global supplies and the war in Ukraine has pushed energy prices higher. The confused economic outlook has sparked a slide in stock markets around the world and led some economists to predict a recession is coming. Nearly 70% of leading academic economists polled by the Financial Times last month predicted the US economy would head into recession next year. Fed Chairman Jerome Powell said on Wednesday that he does not believe the US is currently in a recession. But he said the Fed was prepared to keep raising interest rates to lower prices and that it was inevitable that such a move would slow the economy and affect the labor market. “Price stability is what makes the whole economy work,” Powell said.
