US economy slips into ‘technical recession’ as inflation bites

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The United States (U.S.) economy slipped into “technical recession”, recording a 0.9% contraction in gross domestic product (GDP) in the second quarter (Q2) of 2022.

This marks two consecutive quarters of negative growth following a 1.6% annual decline in Q1 according to the Commerce Department, which said yesterday that the market had pencilled in a gain of 0.5% during the April-to-June span.

The downturn in the world’s biggest economy follows a significant rise in the prices of goods and services, largely attributed to the global energy crisis, which has spread to other areas of the economy.

The Commerce Department said the GDP reflected declines in inventories (-2.01%), residential investment (-0.71%), and government spending (-0.33%). But this was offset by gains in exports (+1.43%) and consumer spending (+0.7%).

The much-anticipated GDP report also showed that real personal income fell 0.5%. And personal saving as a percentage of disposable personal income dropped to 5.2% in Q2 from 5.6% in Q1.

The NBER committee pronounces the U.S. economy is in recession after a significant decline in economic activity that is spread across the economy and that lasts more than a few months.

Moreover, the drop in inventories was led by a decline in retail trade, primarily in general merchandise stores and motor vehicle dealers. The decrease in government spending was attributed to a dip in non-defence expenditures, mainly due to the sale of crude oil from the Strategic Petroleum Reserve (SPR).

Recall that the U.S. Bureau of Labour Statistics reported a new 40-year high inflation rate of 9.1% in June 2022, driven by higher prices of gasoline, food, and shelter. However, to curb the raging inflation, the Federal Reserve has raised interest rates multiple times this year to almost 2.5%.

Following the two consecutive quarters of contraction, Morgan Stanley economists issued a report declaring a “technical recession” for the U.S. economy.

“Real GDP contracted in the second quarter, marking a technical recession,” the economists wrote. “We have highlighted the risks that 2Q data would mark a technical recession, not an economic one, as private final domestic demand remained positive in the first half of the year,” they said.

However, a non-profit, non-partisan organization, the National Bureau of Economic Research (NBER), determines when the U.S. economy is in a recession.

The NBER committee made up of eight economists makes that determination, only after “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

Despite the developments, the US Federal Reserve Chair, Jerome Powell has made it clear they are willing to risk a downturn and will keep raising interest rates until they see solid evidence that inflation is moving back towards the 2% goal.

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