US economy shrinks in second quarter, signaling unofficial start of recession

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The US economy shrank again in the last three months, unofficially signaling the start of a recession.

The commerce department announced Thursday that gross domestic product (GDP) – a broad measure of the price of goods and services – decreased 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 for the Biden administration as it prepares for a tough midterm election season. White House officials have tried to tamp down talk of a recession, arguing that many parts of the economy remain strong.

The growth rate stands in marked contrast to the robust 6.9% annual increase in GDP recorded in the final quarter of 2021 when the economy roared back from Covid shutdowns.

Two quarters of negative GDP growth are widely regarded as a signal that the economy has gone into recession. But the National Bureau of Economic Research (NBER) is the official arbiter of when recessions begin and end. While the GDP figures will play into the NBER’s final verdict, it also looks at a wider range of economic factors, including the jobs market, and is unlikely to give its decision soon.

In the meantime, pressure remains on the Biden administration. Surveys of consumer confidence are falling as recession fears grow and Joe Biden’s overall and economic approval poll numbers are currently at the lowest levels of his presidency.

The latest GDP figures came a day after the Federal Reserve announced another three-quarter of a percentage point increase in its benchmark interest rates as it fights to tame inflation.

Prices rose at an annual rate of 9.1% in the year to June, driven up by soaring costs for fuel, food and shelter.

While parts of the US economy remain strong – most notably the jobs market – the Covid pandemic continues to play havoc with global supplies and the war in Ukraine has pushed up energy prices.

The confusing economic outlook has triggered sell-offs 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 will tip into a recession next year.

Fed chair Jerome Powell said on Wednesday that he did not believe the US was currently in a recession. But he said the Fed was prepared to keep raising rates in order to bring prices back down and that it was inevitable that such a move would slow the economy and affect the job market. “Price stability is what makes the whole economy work,” said Powell.