Yellen insists US not in recession as economy shrank 0.9 per cent in second quarter

Two negative quarters meets the informal definition of recession but many economists disagree

Oliver O'Connell
New York
Thursday 28 July 2022 21:46 BST
GDP falls for second consecutive quarter

The US economy shrank by 0.9 per cent during the second quarter of the year, further stoking fears the country is heading into a recession.

Thursday morning’s data from the Bureau of Economic Analysis, part of the Commerce Department, posted a second straight quarterly contraction in gross domestic product – the broadest measure of economic output.

Back-to-back negative GDP quarters constitute an informal definition of recession, but most economists point to a still-robust labour market, with 11 million job openings and an uncommonly low 3.6 per cent unemployment rate. They argue that a recession, if one were to occur, is still a way off.

Treasury Secretary Janet Yellen agreed at a White House press conference when asked about the health of the US economy by President Joe Biden.

“Right now there are an enormous set of global headwinds,” she said. “But our economy remains resilient.”

“From today’s GDP report, growth and private demand has slowed,” Secretary Yellen also observed, “but job creation is continuing” she said adding that household finances remain robust.

The Commerce Department report comes just a day after the US Federal Reserve raised its benchmark interest rate by 0.75 per cent for the second time in a row as it continues efforts to conquer the worst surge in inflation in four decades.

With the consumer price index for June having jumped 9.1 per cent from a year ago, the Fed is aiming for a notoriously difficult “soft landing” – an economic slowdown that manages to rein in rocketing prices without triggering a recession.

The strength of America’s job market, Federal Reserve Chair Jerome Powell said at a news conference on Wednesday, “makes you question the GDP data”.

Asked whether he thought the US was in a recession, Mr Powell foreshadowed Secretary Yellen’s comments, saying he did not think it was, citing the “remarkably strong” labour market and adding “it doesn’t make sense” for the country to be in a recession right now.

Mr Powell also correctly noted that US GDP data is often revised at a later date. In its press release on Thursday morning the BEA noted that the GDP estimate was based on source data that are either incomplete or subject to revision from the source agency and that the second estimate for the quarter will be released on 25 August.

Speaking at the White House alongside business leaders on Thursday, President Joe Biden downplayed talk of a potential recession and said there was “no doubt” growth this year would be slower than last year, when the economy was largely returning to normal after a year of Covid-19-related shutdowns.

“There gonna be a lot of chatter today on Wall Street and among pundits about whether we are in a recession. But if you're looking at our job market, consumer spending, business investment, we see signs of economic progress in the second quarter as well,” he said.

The most widely accepted definition of a recession comes from the National Bureau of Economic Research, a group of economists whose Business Cycle Dating Committee defines it as “a significant decline in economic activity that is spread across the economy and lasts more than a few months”.

The strength of the labour market is just one factor skewing the data, but the NBER often declares the start of a recession well after the fact, so additional data and revisions should be closely monitored.

In a statement released by the White House earlier in the day, President Joe Biden said: “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. Our job market remains historically strong, with unemployment at 3.6 per cent and more than 1 million jobs created in the second quarter alone. Consumer spending is continuing to grow.”

Prior to the release of today’s data, forecasters surveyed by the data firm FactSet had estimated that the nation’s GDP made a tepid annual gain of 0.8 per cent between the beginning of April and the end of June. Others believed a more anaemic level of 0.2 per cent was possible.

The Federal Reserve Bank of Atlanta’s running estimate of GDP growth, based on available economic data, signalled a 1.2 per cent second-quarter decline was on the cards.

Today’s data, though still marking a fall in economic activity, is an improvement on the 1.6 per cent drop in the January-March quarter.

Still, such poor quarterly growth represents a drastic weakening from the 5.7 per cent growth the economy achieved last year. That was the fastest calendar-year expansion since 1984, reflecting how vigorously the economy roared back from the brief but brutal pandemic recession of 2020.

However, the first quarter’s figures were not as alarming as the headlines suggested given that a wider trade deficit caused by increased demand for foreign goods knocked 3.2 per cent from overall growth.

Digging into the details from Thursday’s release, the second quarter decrease in real GDP reflected decreases in inventory investment, housing investment, federal government spending, state and local government spending, and business investment.

However, exports and consumer spending increased. Imports, which had such an impact on the first quarter’s figures, remained up, subtracting from total GDP.

Nevertheless, no matter whether the data says the US is in a recession or not, inflationary woes continue to impact the day-to-day lives of Americans and the way to deal with that is to slow the economy.

Speaking on Thursday morning, author and CNBC anchor Andrew Ross Sorkin observed that while things appear to be moving in the wrong direction faster than expected, this is what is supposed to happen.

“I think it’s a fair view that this is what was supposed to happen if the Federal Reserve was going to do what it’s been doing, which is putting its hands on the neck of the economy trying to slow things down ... and now it’s working,” he said on MSNBC. “It’s sort of a strange feeling to say that this is what we wanted, but we are now going to have a slower economy.”

Mr Sorkin noted that with the upcoming midterm elections the word “recession” has become a political football and Americans feel that things now are very different from 12 months ago when the economy surged back from the pandemic.

Following the release of the GDP data, markets remained steady, Mr Sorkin reasoned, “in large part because there is a view now that the Federal Reserve won’t have to keep its hands on the neck of the economy in the way that it has”.

With additional reporting from The Associated Press

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