The US economy has shrunk for the second quarter in a row, a milestone that would be considered an economic recession in many countries.
That is not the case in the US, which uses additional data to make that call. But the contraction, which is at an annual rate of 0.9% in the three months to July 2022, has drawn widespread attention as economic concerns grew.
Report suggested that prices for groceries, petrol and other basics are rising faster than since 1981, as the US Central Bank raises borrowing costs quickly to try to cool the economy and ease price pressures. Also, fears are rising that a recession is coming, although it is uncertain if it has started already.
Faced with sinking public confidence, US President, Joe Biden, tried to make the case that the economy remains sound, noting that the unemployment rate remains at a low 3.6% and hiring remained strong.
Economy: Recession or not?
This week, ahead of the data from the Commerce Department, Mr. Biden told reporters that the economy is “not going to be in a recession”. His comment prompted opponents in the Republican party to accuse the White House of trying to redefine the term. “White House recession ‘rebrand’ won’t reduce Americans’ suffering,” they said.
In the first three months of the year (2022), the US economy shrank at an annual rate of 1.6%. At the time, economists attributed the decline in the gross domestic product (GDP) to oddities in trade data. But Thursday’s (July 28, 2022) report showed a more marked slowdown, with growth weighed down by declines in the housing market, business investment and government spending. Additionally, consumer spending grew at a slower annual rate of 1%, as people spent more on healthcare, accommodation and dining out, but cut back on goods and groceries.
“Coming off of last year’s historic economic growth – and regaining all the private sector jobs lost during the pandemic crisis – 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.”
US President, Joe Biden
Covering the Reality
Harvard Professor, Jeffrey Frankel, who previously served on the National Bureau of Economic Research committee, the group of academics that is charged with making the official declaration of recession, said he did not think a recession started at the beginning of the year (2022), noting the strong jobs growth. But after that he was less confident.
“Things have already slowed down, so I’m not saying that everything is great. Odds of a recession going forward are substantially higher than for a random year.”
Harvard Professor, Jeffrey Frankel
Inflation in the US hit 9.1% in June 2022, which became the fastest pace of price appreciation in more than four decades. On Wednesday, July 27, 2022, the US Central Bank responded to the problem with another unusually large increase to its key interest rate, which is its second 0.75 percentage point rise since it started raising rates in March 2022.
By making borrowing costs more expensive, the Federal Reserve is hoping to reduce spending on items such as homes and cars, in theory easing some of the pressures putting up prices. But lower demand also means a decline in economic activity.
Recent reports showed consumer confidence falling, the housing market slowing, and the first contraction in business activity since 2020. The US stock market also sunk since the start of the year 2022, and companies from social media giant, Meta, the owner of Facebook and Instagram, to carmaker, General Motors, said they plan to slow hiring. Some other firms, especially in the property sector, announced job cuts.
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