The U.S. economy shrank for a second consecutive quarter, which is a common definition of recession. Additionally, the U.S. economy is enduring a rocky transition from an exceptionally strong post-pandemic recovery to a steep Federal Reserve caused slowdown.
The Commerce Department reported that Gross Domestic Product (GDP) contracted at a 0.9% annual rate in the second quarter of calendar year 2022. With the 1.6% annual rate decline in the first quarter, this means the U.S. economy has declined for two consecutive quarters, a commonly used, but not official definition, of recession. GDP is a broad measure of the goods and services produced across the economy.
Inventories, specifically the pace of restocking, accounted for much of the economic output decline experienced in the second quarter. As an example, Walmart announced that it was cutting prices in its Sam’s Club stores to reduce merchandise levels.
However, the official arbiter of U.S. recessions, the National Bureau of Economic Research (NBER), has not announced that a downturn has begun because an array of other indicators, such as employment and corporate earnings, do not look as dire. NBER defines a recession as a significant decline in economic activity, spread across the economy for more than a few months. It usually doesn’t make a recession determination until long after the fact.
In fact, within the broader economy, the job market remains strong and if employment stays strong, consumer’s will to spend should remain intact.
Consumer spending continues to grow, but at a slower pace. The housing market has cooled down under rising interest rates and high inflation has taken the steam out of business and consumer spending v
Corporate earnings haven’t been as bad as investors had feared, suggesting that soaring inflation and signs of declining economic growth aren’t weighing too heavily on the economy.
The Federal Reserve raised interest rates from near zero to a range between 2.25% and 2.5%, so far this year, and Chairman Powell hinted that the pace of rate increases would eventually flow.
The economy is slowing down as the Federal Reserve acts to bring down inflation. The challenges facing the economy are high inflation, weakening consumer sentiment and supply chain volatility. Consumer spending accounts for about two-thirds of risk U.S. economic output.
References: