GDP falls for the second consecutive quarter: US technical recession

As of: 07/27/2022 17:07

The wave of interest rate increases in the fight against high inflation is slowing the US economy. In the spring, the US economy contracted again and plunged into recession.

What some economists and leading bankers have recently prophesied has happened now: the US economy is in a technical recession. Economic output fell for the second consecutive quarter. Between April and the end of June, the gross domestic product (GDP) shrank by 0.9%. The economy was down 1.6 percent in the first quarter.

Companies invest less

The US Department of Commerce justified the fall in GDP again with lower inventories and corporate investment. Added to this were falling construction spending and falling government spending. While household exports and consumer spending increased, they were unable to compensate for declines elsewhere.

The US Federal Reserve likely contributed to the slowdown through its restrictive monetary policy. In order to fight high inflation, it has raised its main interest rate by 2.25 percentage points since March. Never has there been such a sharp wave of interest rate increases in such a short time.

The Fed chief has so far ignored the risk of a recession

Yesterday Fed chairman Jerome Powell downplayed the risk of recession. After another sharp hike of 0.75 percentage points, he said he did not believe the economy was going to be in recession. As a justification, he referred to the strength of the labor market. One is close to full employment. In the first half of the year, an average of 456,700 new jobs were created per month.

Even US President Joe Biden saw no slowdown in the US economy earlier this week. “In my opinion, we are not heading for a recession,” he said on Monday, referring to the good data in the labor market. The latest data, which now shows a recession in the first half of the year, is a serious blow to Biden ahead of the November elections to Congress. His political opponents cite this development as evidence of his supposedly flawed economic policy.

“High inflation rates, rising key interest rates and significantly weaker financing conditions are a burden,” said economist Bastian Hepperle of Hauck Aufhäuser Lampe Privatbank. This spoils the consumption mood and companies limit their investment and recruitment plans. “The prospects aren’t rosy at all.”

Economists: “Not a real recession”

Other economists were less pessimistic. Commerzbank expert Bernd Weidensteiner spoke of a technical, but not a wide-ranging recession. He referred to the National Bureau of Economic Research (NBER), which, in addition to GDP development, also takes into account other economic variables, such as the labor market, and currently does not see a real recession. “The US economy is in a technical recession while officially announcing the economy is not in contraction,” agrees Thomas Gitzel, VP Bank chief economist, essentially stays on course for interest rate hikes.

Fed chairman Powell signaled yesterday another large interest rate hike by 0.75 percentage point in September. He reiterated that an interest rate level of 3 to 3.5 percent at year-end was the desired level of monetary policy. Only then, i.e. from 2023, the Fed signaled a slower pace.

US growth figures are extrapolated to the year, ie on an annual basis. Therefore, they are not directly comparable with growth data from Europe, where this is not the case. To get closer to a growth rate comparable to that of Europe, we would have to divide the US rate by four.

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