WASHINGTON/LONDON: The US economy contracted again in the second quarter amid aggressive monetary policy tightening from the Federal Reserve to combat high inflation, which could fan financial market fears that the economy was already in recession.
Gross domestic product fell at a 0.9 per cent annualised rate last quarter, the Commerce Department said in its advance estimate of GDP on Thursday. Economists polled by Reuters had forecast GDP rebounding at a 0.5 per cent rate.
Estimates ranged from as low as a 2.1 per cent rate of contraction to as high as a 2.0 per cent growth pace. The economy contracted at a 1.6 per cent pace in the first quarter.
The second straight quarterly decline in GDP meets the standard definition of a recession.
But the National Bureau of Economic Research, the official arbiter of recessions in the United States defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators.”
Job growth averaged 456,700 per month in the first half of the year, which is generating strong wage gains. Still, the risks of a downturn have increased. Homebuilding and house sales have weakened while business and consumer sentiment have softened in recent months.
The White House is vigorously pushing back against the recession chatter as it seeks to calm voters ahead of the November 8 midterm elections that will decide whether President Joe Biden’s Democratic Party retains control of the US Congress.
Treasury Secretary Janet Yellen was scheduled to hold a news conference on Thursday to “discuss the state of the US economy.” While labour market remains tight, there are signs it is losing steam.
A separate report from the Labour Department on Thursday showed initial claims for state unemployment benefits decreased 5,000 to a seasonally adjusted 256,000 for the week ended July 23. Economists polled by Reuters had forecast 253,000 applications for the latest week.
Jobless claims remain below the 270,000-350,000 range that economists say would signal an increase in the unemployment rate. Slowing economic growth could, however, encourage the Fed to step back from hefty interest rate increases, though much would depend on the path of inflation, which is way above the US central bank’s 2 per cent target.
The Fed on Wednesday raised its policy rate by another three-quarters of a percentage point, bringing the total interest rate hikes since March to 225 basis points. Fed Chair Jerome Powell acknowledged the softening economic activity as a result of tighter monetary policy.
SHARES TAKE BREATHER
Meanwhile, world shares consolidated a six-week high on Thursday as investors scented a possible slowdown in the pace of US rate hikes, a shift in tone that comforted bond markets but sent the dollar to a three-week low against the yen.
Europe gained as record-busting $11.5 billion profits from oil giant Shell sent commodity stocks soaring, although momentum faded on data showing euro zone consumer confidence slumping as inflation and the Ukraine war rage.
Eyebrows were raised too as China appeared to abandon mentions of specific growth targets for this year, stating instead that it would “strive to achieve the best possible results”.
Wall Street futures were down with US GDP figures due shortly. US President Joe Biden was scheduled to speak to Chinese counterpart Xi Jinping later on Thursday while tech giants Apple and Amazon are both set to report results.
The Federal Reserve surprised no one by lifting rates 75 basis points to 2.25 per cent-2.50 per cent on Wednesday, but did alter its statement to cite some softening in recent data.
Fed Chair Jerome Powell sounded suitably hawkish on curbing inflation in his news conference, but also dropped guidance on the size of the next rate rise and noted that “at some point” it would be appropriate to slow down.
“There was a pretty convincing risk-on reaction from the market to the Fed, but whether that can continue remains to be seen,” said Abrdn investment director James Athey. — Reuters
