US economy contracts for 2nd consecutive quarter

The US economy contracted at an annual rate of 0.9pc in the second quarter, marking a second consecutive quarter of contraction and signaling the economy may be in a recession by a commonly viewed measure.

The contraction in the second quarter, according to the "advance estimate" from the Bureau of Economic Analysis (BEA), followed a 1.6pc annual contraction in the first quarter. A second estimate, with more complete data, will be released on 25 August.

The decrease in GDP reflected decreases in private inventories, home construction and federal, state and local government spending. These decreases were partly offset by increases in exports as well as slowing, but still positive, personal consumption. Imports, which subtract from GDP, increased.

Today's report comes as the Federal Reserve has embarked on its steepest course of rate hikes in decades to curb inflation that spiked at 9.1pc in June. The Fed yesterday hiked its target rate by 75 basis points, its second such consecutive increase, and Fed chairman Jerome Powell reiterated that the Fed could achieve its goal of slowing the economy without inducing a recession.

Two consecutive quarters of economic contraction are frequently viewed as technically signaling a recession, even as the official arbiter of recessions, the National Bureau of Economic Research, adheres to a definition of recessions that is broader. Its definition reflects a significant decline in activity over more than several months encompassing measures of personal income, nonfarm payroll employment, personal consumption, wholesale-retail sales and industrial production.

Residential investment fell at a 14pc pace in the quarter, reflecting the downturn in home building on the heels of the Fed's recent rate increases. Federal government spending fell by 3.2pc, with nondefense spending off by 10.5pc, reflecting the end of Covid-19 stimulus to individuals and companies.

Offsetting the declines, exports rose by 18pc and imports climbed by 3.1pc. Personal consumption rose by 1pc after a 1.8pc annual gain in the first quarter.

The resilience of the labor market is the main stalwart against arguments for recession as the unemployment rate holds at 3.6pc, near the pre-pandemic low, and job growth averaged about 455,000/month in the first half of the year.

"I don't think it's likely that the US economy is in a recession because we do see a very strong labor market," Fed chair Powell said yesterday in a press conference.

By Robert Willis