WASHINGTON — The U.S. economy shrank from April through June for a second straight quarter, contracting at a 0.9% annual pace and raising fears that the nation may be approaching a recession.
The decline that the Commerce Department reported Thursday in the gross domestic product — the broadest gauge of the economy — followed a 1.6% annual drop from January through March. Consecutive quarters of falling GDP constitute one informal, though not definitive, indicator of a recession.
The GDP report for last quarter pointed to weakness across the economy. Consumer spending slowed as Americans bought fewer goods. Business investment fell. Inventories tumbled as businesses slowed their restocking of shelves, shaving 2 percentage points from GDP.
Higher borrowing rates, a consequence of the Federal Reserve’s series of rate hikes, clobbered home construction, which shrank at a 14% annual rate. Government spending dropped, too.
The report comes at a critical time. Consumers and businesses have been struggling under the weight of punishing inflation and higher loan costs. On Wednesday, the Fed raised its benchmark rate by a sizable three-quarters of a point for a second straight time in its push to conquer the worst inflation outbreak in four decades.
The Fed is hoping to achieve a notoriously difficult “soft landing”: An economic slowdown that manages to rein in rocketing prices without triggering a recession.
Apart from the United States, the global economy as a whole is also grappling with high inflation and weakening growth, especially after Russia’s invasion of Ukraine sent energy and food prices soaring. Europe, highly dependent on Russian natural gas, appears especially vulnerable to a recession.
In the United States, the inflation surge and fear of a recession have eroded consumer confidence and stirred anxiety about the economy, which is sending frustratingly mixed signals. And with the November midterm elections nearing, Americans’ discontent has diminished President Joe Biden’s public approval ratings and could increase the likelihood that the Democrats will lose control of the House and Senate.
Fed Chair Jerome Powell and many economists have said that while the economy is showing some weakening, they doubt it’s in recession. Many of them point, in particular, to a still-robust labor market, with 11 million job openings and an uncommonly low 3.6% unemployment rate, to suggest that a recession, if one does occur, isn’t here yet.
“The back-to-back contraction of GDP will feed the debate about whether the U.S. is in, or soon headed for, a recession,” said Sal Guatieri, senior economist at BMO Capital Markets. “The fact that the economy created 2.7 million payrolls in the first half of the year would seem to argue against an official recession call for now.”
Still, Guatieri said, “the economy has quickly lost steam in the face of four-decade high inflation, rapidly rising borrowing costs and a general tightening in financial conditions.”
In the meantime, Congress may be moving toward approving action to fight inflation under an agreement announced Wednesday by Senate Majority Leader Chuck Schumer and Sen. Joe Manchin, a West Virginia Democrat. Among other things, the measure would allow Medicare to negotiate prescription drug prices with pharmaceutical companies, and the new revenue would be used to lower costs for seniors on medications.
In the wake of Thursday’s government report, Biden dismissed any notion that the data depicted an economy in recession.
The administration has stressed that solid job growth and low unemployment show that the U.S. economy is still growing despite two consecutive quarterly declines in GDP. Speaking from the White House, Biden leaned on remarks that Powell and other economic leaders have made.