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The U.S. economy shrunk by 0.9% in the second quarter of 2022, marking a second consecutive quarter of contraction and meeting the technical definition of a recession.
On Thursday, the U.S. Commerce Department released its report on U.S. gross domestic product (GDP) showing an economy buffeted from multiple angles: high inflation, businesses with shrunken inventories, and a housing market struggling with affordability problems.
All the while, interest rates are being raised by the Federal Reserve in an attempt to cool the economy and tame inflation. On Wednesday, the Fed raised the benchmark rate by another 0.75 percentage points — its fourth increase of the year.
Of all the factors cited by the report, inflation’s fingerprints could be detected across each category. Consumer spending and business investment were both found to have declined, a consequence of higher prices and borrowing costs.
Technically speaking, the U.S. has crossed the threshold where it may be considered in a recession, which is traditionally defined as a period of economic decline marked by two consecutive quarters of GDP contraction.
Despite the drop in GDP and the rise in inflation, U.S. unemployment levels remain below 4% and the labor market has retained its tightness. Markets also reacted negatively to the GDP report, with all three major U.S. indices seeing declines after it was released.
Treasury Secretary Janet Yellen said over the weekend that a decline in GDP is not the only indicator of a recession. In an interview last Sunday, Yellen acknowledged that job creation could slow down in the coming months, but maintained that there was no “broad-based weakness in the economy”.
“Growth is slowing globally. And I’m not saying that we will definitely avoid a recession, but I think there is a path that keeps the labor market strong and brings inflation down,” Yellen added.
This view has been echoed by Federal Reserve chairman Jerome Powell. Since the Fed embraced a more hawkish stance in March, the central bank has been gingerly navigating the economy for a “soft landing” where inflation comes down without triggering a recession.
In its statement justifying its recent rate hike on Wednesday, the Federal Open Market Committee (FOMC) noted that the “recent indicators of spending and production have softened”, but highlighted the continued strength of job gains in recent months.
Following the latest rate hike, Powell said that the goal remained avoiding a recession and restoring price stability. Powell said to do so may necessitate reducing growth to help correct the supply and demand imbalances that are fueling much of the inflation in the U.S. economy.
“We actually think we need a period of growth below potential in order to create some slack so that the supply side can catch up. We also think that there will be, in all likelihood, some softening in labor-market conditions,” Powell remarked at a press conference.
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