US economy is in decline again, fueling recession fears

A key measure of economic output fell for the second quarter in a row, raising fears that the United States was entering – or may have already begun – a recession.

Gross domestic product, adjusted for inflation, fell 0.2 percent in the second quarter, the Commerce Department said Thursday. The decline followed a 0.4 percent decline in the first quarter. The estimates for both periods will be revised in the coming months as government statisticians receive more complete data.

The news of successive contractions sparked a debate in Washington about whether a recession had begun and, if so, whether President Biden was to blame. Economists largely say that conditions do not meet the formal definition of a recession, but that the risks of a recession are increasing.

For most people, however, a ‘recession’ label is less important than economic realities: growth is slowing, companies are pulling out and households are finding it harder to keep up with rapidly rising prices.

“We’re definitely losing momentum,” said Tim Quinlan, senior economist at Wells Fargo. “Income gains at the minimum struggle to keep up with inflation, and that’s what is crumbling on people’s ability to spend.”

A delay in itself is not necessarily bad news. The Federal Reserve has tried to cool the economy an attempt to tame inflationand the White House has argued that the slowdown is part of an unavoidable and necessary transition to sustainable growth after last year’s rapid recovery.

“After last year’s historic economic growth — and the recovery of all the private sector jobs lost during the pandemic crisis — it’s no surprise that the economy is slowing as the Federal Reserve tries to cut inflation” Biden said in a statement. statement issued after the publication of the GDP report. “But even as we face historic global challenges, we are on the right track and will come through this transition stronger and safer.”

Fed chairman Jerome H. Powell acknowledged that the road to avoiding a downturn was “narrowing” in part because of global forces, including the war in Ukraine and China’s strict pandemic policy, which are beyond the control of the Fed. central bank.

“When you skate on thin ice, you wonder what it takes to push you through, and we’re on thin ice now,” said Diane Swonk, KPMG’s chief economist.

Matthew Martin, 32, pays more for the butter and eggs that go into the intricately decorated sugar cookies he sells as part of a home business. At the same time, his sales are falling.

“I don’t think people have that much money to throw at cookies right now,” he said.

Mr. Martin, a single father of two, is trying to cut spending, but it’s not easy. He’s replaced trips to the movies with day trips, but that means spending more on gas. He hopes to sell his house and move to a cheaper place, but it has proven difficult to find a home he can afford to buy, especially as mortgage rates have risen. He’s been thinking about getting a conventional nine-to-five job to pay the bills, but then he’d have to pay for childcare for his four-year-old twins.

“Honestly, I’m not 100 percent sure what I’m going to do,” he said.

When GDP fell in the first three months of the year, some dismissed the drop as a fluke, the result of quirks in the way government accounts for spending and investment. Underlying measures of demand remained solid, with many economists thinking it was likely that the first quarter data would eventually be revised to show modest gains.

The decline in the second quarter, while milder, is harder to ignore. Housing construction declined sharply, business investment stagnated and after-tax income, adjusted for inflation, declined. Consumer spending, the bedrock of the economy, grew, albeit at the slowest pace since the early months of the pandemic.

“Q2 is really getting closer to the definition of a bona fide slowdown,” said Gary Schlossberg, a global strategist at Wells Fargo Investment Institute. “What we saw in this quarter was an outright drop in domestic spending.”

Economists often use two quarters of falling GDP as a shorthand definition of a recession. In some countries that is the formal definition.

But in the United States, the declaration of a recession falls to a private, not-for-profit research organization, the National Bureau of Economic Research. The group defines a recession as “a significant decline in economic activity spread across the economy lasting more than a few months,” and it bases its decisions on several indicators — usually just months after the fact.

Some forecasters believe a recession can be avoided if inflation cools enough for the Fed to slow interest rate hikes before they take too much of a toll on staffing and spending.

The economy still has important strengths. Job growth has remained robust and despite a recent surge in unemployment insurance claims, there is little sign of a broad increase in job losses.

Households are sitting on trillions of dollars in savings accumulated earlier in the pandemic, which could help them endure higher prices and interest rates.

“What drives the US consumer is the healthy job market, and we really need to focus on job growth to capture the turning point in this business cycle,” said Blerina Uruci, an economist at T. Rowe Price. The Department of Labor will release data on hiring and unemployment in July next week.

The ongoing effects of the pandemic are making the signals from the economy more difficult to interpret. Americans bought fewer cars, banks and other goods in the second quarter, but forecasters had long expected spending on goods to decline as consumers reverted to prepandemic spending patterns. Indeed, economists argue that a cutback in spending on goods is needed to ease pressure on overstretched supply chains.

At the same time, spending on services increased. That could be a sign of consumer resilience in the face of rising airfare and rental car fares. Or it could be just a temporary willingness to endure high prices, which will fade along with the summer sun.

“There will be an element of, ‘We haven’t had a summer vacation in three years, so we’ll just take one no matter how much it costs,’” said Aditya Bhave, senior economist for Bank of America. “The question is what happens after the summer.”

Avital Ungar tries to interpret the conflicting signals in real time. Ms. Ungar runs a small business that organizes food tours for tourists and businesses in San Francisco, Los Angeles, and New York.

When restaurants closed and travel stopped early in the pandemic, Ms. Ungar had no income. She’s made it by offering virtual happy hours and online cooking classes. When personal tours returned, things were uneven and shifted with each new coronavirus strain. Ms Ungar said demand remains difficult to predict as prices rise and the economy slows.

“We’re in two different kinds of uncertainty,” she said. “There was the pandemic uncertainty, and then there’s the economic uncertainty right now.”

In response, Ms. Ungar has shifted her focus to more expensive tours, which she says will hold up better than those aimed at more price-sensitive customers. And she tries to avoid long-term commitments that are difficult to dissolve when demand cools.

“Every annual plan I’ve made over the past three years hasn’t happened that way,” she said. “It’s very important to recognize that what worked yesterday won’t work tomorrow.”

Lydia DePillis reporting contributed.