WASHINGTON — Bubbed by rising consumer prices and rising interest rates, the US economy shrank at an annual rate of 0.6% from April to June, the government announced on Thursday, unchanged from its previous estimate for the second quarter.
It marked the second consecutive quarter of economic contraction, an informal rule of thumb for a recession. Most economists, citing a strong and resilient American labor market, believe the world’s largest economy is not yet in a downturn. But they worry it could be coming as the Federal Reserve hikes interest rates to fight inflation.
Consumer spending rose 2% annually, but this gain was offset by a decline in corporate inventories and home investment.
The US economy is sending mixed signals this year. Gross Domestic Product or GDP has declined in the first half of 2022. But the labor market has remained strong. Employers are adding an average of 438,000 new jobs per month this year and are on track to become the second-best year for hiring (after 2021) in government records dating back to 1940. Unemployment is 3.7%, which is low by historical standards. There are currently about two jobs for every unemployed American.
But the Fed has hiked interest rates five times this year — most recently on September 21 — to stem consumer prices, which rose 8.3% year-on-year in August despite falling gasoline prices. Higher borrowing costs increase the risk of a recession and higher unemployment. “We have to get inflation behind us” Fed Chair Jerome Powell said last week. “I wish there was a painless way to do this. There is not any.”
The risk of a recession — coupled with persistently and painfully high prices — poses a stumbling block for President Joe Biden’s Democrats as they attempt to retain control of Congress in November’s midterm elections. However, the decline in gasoline prices has boosted consumer sentiment over the past two months.
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