The US economy contracted again in the second quarter, amid an interest rate hike promoted by the Fed, the US central bank, to fight inflation. The result, released this Thursday (28), fuels financial market fears that the economy is already in recession.
Gross domestic product (GDP) fell at an annualized rate of 0.9% in the last quarter, the Commerce Department said in its preliminary estimate. Economists polled by Reuters predicted a rise of 0.5%.
Estimates ranged from a contraction of 2.1% to a growth rate of 2.0%. The economy contracted at a pace of 1.6% in the first quarter.
The U.S. National Bureau of Statistics, the official arbiter of recessions in the country, defines a recession as “a significant decline in economic activity spread throughout the economy, lasting more than a few months, typically visible in output, employment, real income, and other indicators”.
US President Joe Biden said it is no surprise that the US economy is slowing. He said he remains optimistic about the outlook for the economy, saying the job market is historically strong and consumer spending continues to grow.
“We’re on the right track and will go through this transition stronger and safer,” Biden said.
Job growth averaged 456,700 jobs per month in the first half of the year, which is generating strong salary gains. However, home construction and sales have weakened, while consumer and business sentiment has worsened in recent months.
The White House is contesting comments about a threat of recession as it seeks to calm voters ahead of the Nov. 8 midterm elections that will decide whether Biden’s Democratic Party retains control of Congress.
A parallel Labor Department report on Thursday showed that initial claims for unemployment benefits fell by 5,000 to a seasonally adjusted reading of 256,000 in the week ending July 23. Economists polled by Reuters predicted 253,000 applications for the past week.
Claims for unemployment benefits remain below the 270,000 to 350,000 range, which economists say signals a rise in the unemployment rate. Still, slowing economic growth could encourage the Fed to reconsider its hefty rate hikes, although that will depend on the path of inflation, which is well above the central bank’s 2% target.
The Fed on Wednesday raised its interest rate by 75 percentage points, taking the total increase in borrowing costs since March to 225 basis points. Fed Chair Jerome Powell acknowledged the cooling off in economic activity as a result of tighter monetary policy.
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