The latest economic data report makes it official: The US has now seen two quarters of declining GDP, meaning the economy shrunk in the first six months of the year. It’s a common but unofficial definition of a recession.
GDP fell at an annual rate of 0.9 percent in the second quarter of the year, according to data released by the Commerce Department on Thursday. That comes after GDP fell at a 1.6 percent annualized rate in the first quarter.
So is the US entering an economic downturn?
Although some may claim the United States is now in a “technical” recession, many economists say this probably doesn’t mean the country is in a recession because the overall labor market is still strong.
“I don’t think these two quarters of negative growth indicate a recession at this point,” said Beth Ann Bovino, the chief US economist at S&P Global.
Recessions usually mean that more people are losing their jobs and struggling to find new ones. So far, that doesn’t seem to be happening. Bovino pointed to several indicators that underscore the health of the labor market: the unemployment rate stands at 3.6 percent, just slightly above its level before the pandemic, which was at a 50-year low. Employers have added hundreds of thousands of jobs to the economy each month. Unemployment claims have been rising in recent weeks, but they’re still at low levels. Job openings have also dipped slightly, but there are still nearly two job openings for every unemployed person.
Recessions are formally declared by a group of eight economists at the National Bureau of Economic Research who make up the Business Cycle Dating Committee. The group defines a recession as a “significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
GDP, a broad measure of the nation’s total economic output, is an important aspect the committee considers, but it’s not the only one. The committee also looks at employment levels, personal income, retail sales, and industrial production. But the committee often takes about a year to formally declare the start of a recession, meaning that they probably won’t make an announcement anytime soon.
Recessions are usually marked by a sharp uptick in the unemployment rate and widespread layoffs across different economic sectors. Economists who don’t believe the country is in a recession point out that the United States isn’t seeing that, although activity in sectors like housing are slowing as the Federal Reserve increases interest rates, making it more expensive for Americans to take out a mortgage.
Economists and policymakers also point out that the GDP data is subject to revisions, and Thursday’s report only includes the advance numbers for the second quarter, meaning that the numbers could be revised upwards or downwards in the coming months — as more information emerges about the past quarter, it might turn out that the US economy wasn’t shrinking after all or the decline could worsen. The next revision for second quarter GDP is set to be released on August 25, and will account for more data that isn’t available yet.
Still, the economy is clearly cooling and even if the United States isn’t in a recession yet, that doesn’t mean a painful economic downturn won’t hit in the coming months.
The economy is slowing down significantly
According to the GDP report, consumer spending slowed in the second quarter, growing 1 percent on an annualized basis compared to 1.8 percent in the first quarter. Spending on services grew, though, indicating that consumers are still going out and spending money.
“Consumers are still spending,” said Gregory Daco, the chief economist at EY-Parthenon. “They’re just spending with more caution and more worries about inflation. Businesses are still hiring and they’re investing, but they are also generally worried about the outlook.”
The decline in GDP was also fueled by a downturn in the housing market. Residential investment fell 14 percent at an annual rate in the second quarter as home construction slowed and sales of new and existing homes fell.
The Fed is also set to continue hiking interest rates this year, which will likely slow the economy further. By making borrowing money more expensive, central bank officials are trying to dampen consumer demand, which should eventually result in a drop in prices. But the Fed risks going too far, causing a downturn in the labor market as businesses pull back on hiring.
Jerome Powell, the chair of the Federal Reserve, said on Wednesday that he did not believe the United States was in a recession now, pointing to the “very strong” labor market, although he noted that there were signs that the economy was cooling. He also acknowledged that the path to avoiding a recession had “narrowed” and the labor market would likely have to soften to bring down inflation.
“We’re not trying to have a recession, and we don’t think we have to,” Powell said at a press briefing. “We think that there’s a path for us to be able to bring inflation down while sustaining a strong labor market.”
Powell said he had not seen the GDP numbers ahead of the report’s release, but noted that the advance numbers often get revised, so it was important to take the data with a “grain of salt.”
On Wednesday, the Fed raised interest rates three-quarters of a percentage point, another big increase and the fourth time the central bank has raised rates this year after keeping them at near zero for much of the pandemic. The move came after recent inflation data showed that consumer prices rose 9.1 percent from a year earlier in June, a new four-decade high.
Powell said that another “unusually large” interest rate hike could be appropriate at the Fed’s next policy meeting in September, although officials have yet to make any decision and will evaluate new economic data in the coming weeks. Powell said the Fed will be looking for “compelling evidence” that inflation is coming down closer to the central bank’s target of 2 percent inflation.
After the report’s release, the Biden administration tried to temper fears about an economic slowdown. President Biden said in a statement that it was “no surprise” that the economy was cooling as the Fed tries to tame inflation. On Wednesday, Karine Jean-Pierre, the White House press secretary, also said the administration did not believe the country was in a recession.
“Right now, we’re seeing that strong labor market with about 400,000 jobs that have been created each month,” Jean-Pierre said at a press briefing. “So the way that we see is that we are not currently in a recession or a pre-recession.”
But even if the United States isn’t in a recession, many Americans are still facing hardships. Households are finding it difficult to afford basic essentials, like rent and food at the grocery store. Although gas prices have started to fall from a peak of more than $5 a gallon last month, fuel prices are much higher than they were a year ago. And the economy still contracted, which isn’t great for American businesses and consumers.
“It’s never pleasant to see a negative number for GDP,” Bovino said. “It means the economy shrank, and somebody feels it and that’s not good.”