Recession lurking as US economy contracts again in the second quarter


The White House is vigorously pushing back against the recession chatter as it seeks to calm voters ahead of the Nov 8 midterm elections that will decide whether President Joe Biden’s Democratic Party retains control of the US Congress.

Treasury Secretary Janet Yellen is scheduled to hold a news conference on Thursday to “discuss the state of the US economy”. While the labour market remains tight, there are signs it is losing steam.

A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits decreased by 5,000 to a seasonally adjusted 256,000 for the week ended Jul 23. Economists polled by Reuters had forecast 253,000 applications for the latest week.

Jobless claims remain below the 270,000 to 350,000 range that economists say would signal an increase in the unemployment rate. With the economy struggling, the Fed could slow its pace of rate hikes, though much would depend on the path of inflation, which is way above the US central bank’s 2 per cent target.

The Fed on Wednesday raised its policy rate by another three-quarter of a percentage point, bringing the total interest rate hikes since March to 225 basis points. Fed Chair Jerome Powell acknowledged the softening economic activity as a result of tighter monetary policy.

The trade deficit narrowed sharply last quarter, thanks to record exports, adding 1.43 percentage points to GDP growth. That ended seven straight quarters in which trade was a drag on growth.

While businesses continued to rebuild inventory, the pace slowed significantly from what was seen in the fourth quarter of 2021 and the first three months of this year. Inventories sliced off 2.01 percentage points from GDP.

Consumer spending, which accounts for more than two-thirds of US economic activity, grew at a 1.0 per cent rate. That was the slowest since the second quarter of 2020 and a step-down from the first quarter’s moderate 1.8 per cent pace.

Business spending contracted, pulled down by weak investment in equipment and nonresidential structures. Government spending was also soft, reflecting a sharp decline in non-defence outlays.

A measure of domestic demand – excluding trade, inventories and government spending – was unchanged, underscoring the significant loss of momentum in the economy. Final sales to private domestic purchasers account for roughly 85 per cent of aggregate spending and increased at a 3.0 per cent rate in the first quarter.

Residential investment was contracted by the most since the COVID-19 recession two years ago as higher mortgage rates weighed on homebuilding as well as homes sales, which reduced brokers’ commissions.

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