Government shows economy shrank 0.6% last quarter – The Morning Call

WASHINGTON — The U.S. economy shrank by an annualized 0.6% from April to June, the government said Thursday, compared to an initial estimate. It marked the second consecutive quarter of economic decline, which is facing one unofficial sign of a recession.

However, most economists expressed doubt that the economy is in or on the brink of recession, given that America’s labor market remains strong, with high hiring, low unemployment and ample vacancies. Still, inflation is near a four-decade high and is punishing consumers and businesses. And the Federal Reserve’s aggressive efforts to curb inflation by sharply raising interest rates increase the risk of an eventual recession.

In its revised estimate on Thursday, the Commerce Department estimated that the nation’s gross domestic product — the broadest measure of economic output — shrank last quarter, though less than the 1.6% annual drop in the January-March period. In its preliminary estimate for April-June, the government estimated that the economy shrank by 0.9%.

Consumer spending, which accounts for nearly 70% of U.S. economic activity, rose an annualized 1.5% last quarter, faster than trade had initially estimated, but fell from 1.8% between January and March.

In contrast, government spending and business investment declined. And inventories fell as businesses slowed restocking, cutting 1.8 percentage points from GDP.

Rising interest rates hit the housing market. Housing construction fell by 16.2%.

In an effort to stem inflation, the Fed has raised the key interest rate four times this year in increasingly large increments. By raising loan rates, the central bank makes it more expensive to get a mortgage, car or business loan. The idea is that consumers and businesses will borrow and spend less, thereby helping to cool the economy and slow inflation.

Meanwhile, signs of economic weakness are increasing. Rising borrowing costs weakened the housing market in particular. Sales of both new and existing homes fell sharply, and the pace of home construction fell to the lowest level since the start of last year in July. Similarly, retail sales were flat last month, while inflation and higher lending rates forced many households to spend more cautiously.

Under Chairman Jerome Powell, the Fed aims for a “soft landing” in which the economy slows enough to reduce hiring and wage growth without triggering a recession, and lowers inflation to the Fed’s annual target of 2%. But by tightening lending even as the economy has slowed, the Fed increases the risk that rate hikes will trigger a recession. A spike in inflation and fears of a recession have eroded consumer confidence and heightened public anxiety about the economy.

But the labor market remains stable. Employers added an average of 470,000 jobs a month, and unemployment fell to 3.5%, matching a 50-year low before the pandemic.

“The economy remains a puzzle, economic growth is still negative, but layoffs remain surprisingly low,” said Christopher Rapkey, chief economist at research firm FWDBONDS LLC. “The recession we all know hasn’t hit yet.”

Inflationary pressures have begun to moderate modestly in recent weeks, driven by a steady decline in gas prices from their highs and lower headline inflation. In July, consumer prices rose 8.5% more than a year earlier, compared to 9.1% year-on-year in June. Moreover, in the monthly calculation, prices did not change from June to July.

However, spending on many essentials, particularly food and rent, has remained largely flat and continues to squeeze millions of families.