US GDP falls for second straight quarter, stoking recession fears

The U.S. economy appeared to shrink for the second consecutive quarter, according to federal data released Thursday, amid growing concern the U.S. could be slipping into a recession.

U.S. gross domestic product (GDP) shrunk between April and June, the Commerce Department reported, marking the second-straight quarter of economic contraction.

GDP fell at a yearly pace of 0.9 percent in the second quarter, according to the Commerce Department’s first estimate of economic growth over the previous three months. Put simply, the U.S. economy would shrink by nearly 1 percent if the second quarter’s pace of growth lasted for an entire year.

“The U.S. economy is struggling,” Scott Hoyt, senior director at Moody’s Analytics, wrote in a Thursday analysis.

“We now expect growth to struggle to reach potential both this year and next. However, we don’t believe the economy is in a recession,” he continued.

Many economists expected GDP to fall for a second consecutive quarter as the economy faced more pressure from high inflation, rising interest rates, slowing job growth, falling home sales and other headwinds. 

While the economy was almost certain to slow after growing 5.7 percent in 2021, experts have become more fearful of the U.S. slowing into a recession after GDP fell at an annualized rate of 1.6 percent in the first quarter.

Two straight quarters of negative economic growth have long been used as a rule of thumb to determine when the U.S. is in recession and is the formal threshold for a recession in other countries. But economists in the U.S. consider a broader range of data when determining if the U.S. is in recession.

“The headline of a second straight decline in real GDP highlights the abrupt change in the path of the U.S. economy, but the ongoing strength in the job market and other signs of growth make it unlikely that this will be categorized as a recession at this point,” said Mike Fratantoni, chief economist for the Mortgage Bankers Association, in a Thursday analysis.

The U.S. has added 2.7 million jobs since the start of 2022, and consumer spending has continued to increase even amid high inflation. The unemployment rate in June was 3.6 percent, just 0.1 percentage point higher than before the pandemic began, and there were roughly two open jobs for every unemployed American since May.

As the job market has remained resilient, other sectors of the economy have struggled.

A steep decline in business investment and a 3.1 percent surge of imports, which detract from GDP in calculations, were the two major forces behind the second quarter decline.

Gross private domestic investment — which includes sales of buildings, equipment and intellectual property — fell 13.5 percent in the second quarter after rising 5 percent during the first three months of the year. Housing construction fell 14 percent in the second quarter, and construction of other structures fell 11.7 percent over the year.

Consumer spending rose 1 percent over the quarter, driven largely by a 4.1 percent increase in spending on services. Spending on goods fell 4.4 percent during the second quarter after falling 0.3 percent in the first quarter.

“This data fits with our view that the rate of US economic growth will slow noticeably this year, as households and businesses grapple with record high inflation and a steep rise in interest rates,” Cailin Birch, a global economist at the Economist Intelligence Unit, said in a Thursday analysis.

There is no official threshold set by the federal government to determine when the U.S. is in recession. Instead, economists turn to the National Bureau of Economic Research (NBER), a think tank not affiliated with the government, to make that call.

The NBER panel in charge of determining when the U.S. is in a recession also looks at how many jobs the country is creating and other gauges of economic strength to figure out if the country is in a recession, not just GDP data.

Hoyt, of Moody’s Analytics, also said the decline in GDP may be slightly misleading thanks to trade-related quirks and could eventually be revised higher.

“It would not be surprising if the BEA, the government agency that constructs these estimates, is having an especially difficult time in the pandemic accurately measuring real GDP given the resulting big swings in global trade and inventories,” Hoyt wrote.

But that hasn’t stopped Democrats and Republicans from sparring over the true state of the economy.

President Biden and White House officials have tried to convince Americans that the U.S. economy is not yet in a recession thanks to a strong job market. They’ve focused heavily on the NBER’s definition of a recession to show Americans that the economy is not as weak as it may seem.

“It’s no surprise that the economy is slowing down as the Federal Reserve acts to bring down inflation. But even as we face historic global challenges, we are on the right path and we will come through this transition stronger and more secure,” Biden said in a Thursday statement.

Republican lawmakers were quick to release their own declarations of recession. They blamed Biden for driving the economy into ruin and accusing the White House of trying to dupe the American people.

“As Biden and his Democrat allies in Congress busy themselves with changing the definition of a recession, Americans continue to shoulder the burden of troublesome economic conditions,” Rep. Blaine Luetkemeyer (R-Mo.), the ranking member on the House Small Business Committee, said in a Thursday statement.

Most economists do not believe the U.S. is in a recession yet, but that may be little more than a debate over semantics given the threats facing the economy.

The Federal Reserve is likely to keep boosting interest rates as inflation rises, which will continue to slow the economy, as the war in Ukraine and pandemic-related supply chain challenges threaten to make inflation worse.

“Whether the economy meets the conventional or formal definition of recession is in many respects immaterial. Either way, households and firms are reeling from combined energy, inflation, and rate shocks that have damped individuals’ purchasing power and are in the process of reducing household living standards,” wrote Joe Brusuelas, chief economist at audit and tax firm RSM.

“That is the toll levied by the inflation tax and is why it is critical to restore price stability to the economy as soon as is reasonably possible,” he continued.

Updated at 10:46 a.m.