Economy Shrunk in 2nd Quarter, Stoking Recession Fears

Is the U.S. economy in a recession? Not technically. Not yet. But the fact that overall economic output shrunk for a second quarter is a signal that one might be on the way.

The real gross domestic product (GDP), a rough measure of the country’s total economic activity adjusted for inflation, shrunk 0.9% on an annualized basis in the second quarter, the Bureau of Economic Analysis said Thursday.

Businesses—especially retailers and car dealers—spent less on inventories, homebuilding declined, and state and federal government spending decreased. However, important parts of the economy such as consumer spending and exports actually grew, suggesting that the economy is under pressure from overheating inflation, but not yet in a recession. The slowdown fell short of the median forecast of economists, who had expected 0.3% growth instead of a decrease.

Many analysts use a simplified recession definition that says two quarters of negative growth qualifies—and since the economy shrunk at a 1.6% annual rate in the first quarter, we’ve met that requirement. But whether we’re officially in a recession or not is up to a committee of experts at the National Bureau of Economic Research, a nonprofit organization, which hasn’t yet waved the “recession” flag. Unlike in a typical downturn, business is booming and jobs are plentiful, economists said.

“Even if skeptics can be convinced that in this particular instance, back-to-back quarters of negative GDP growth does not constitute a recession, it is undeniable that the economy is cooling,” said Tim Quinlan and Shannon Seery, economists at Wells Fargo Securities, in a commentary.

The main culprit for the slowdown is inflation. With prices for necessities like food and gas having risen rapidly, households have less to spend on other products and services. And while many families are dipping into their savings to keep spending, that can’t continue forever, economists said. 

Not only that, but borrowing costs for loans like mortgages have risen in recent months, which has discouraged both homebuying and other kinds of purchases—a deliberate result of the Federal Reserve’s effort to clamp down on inflation by hiking its benchmark interest rate, making consumer loans more expensive, in an effort to slow the economy and allow supply and demand to rebalance.

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