WASHINGTON (`) – The U.S. economy contracted at an annual rate of 0.6% from April to June, the government said Thursday, in a slight upgrade from its original estimate. It marked a second consecutive quarter of economic contraction met with an informal sign of recession.
However, most economists doubt the economy is in or on the brink of a recession as the US job market remains resilient, with high hiring, low unemployment and widespread job vacancies. Still, inflation is near a four-decade high, punishing consumers and businesses. And the Federal Reserve’s aggressive effort to tame inflation through steep interest rate hikes increases the risk of an eventual recession.
In its revised estimate on Thursday, the Commerce Department calculated that the country’s gross domestic product — the broadest measure of economic output — contracted in the most recent quarter, albeit less than the 1.6% annual contraction seen in the January-March period. In its previous estimate for the April-June quarter, the government had estimated that the economy had contracted by 0.9%.
Consumer spending, which accounts for almost 70% of US economic activity, grew last quarter but at a slower annual pace of 1.5% compared to 1.8% from January to March.
By contrast, government spending and corporate investment declined. And inventories plummeted as companies slowed shelf replenishment, slumping 1.8 percentage points of GDP.
Rising interest rates weighed on the housing market. Residential construction collapsed by 16.2%.
In its bid to curb inflation, the Fed has raised interest rates four times this year in progressively larger increments. By raising lending rates, the central bank makes it more expensive to get a mortgage, car loan, or business loan. The idea is that consumers and businesses borrow less and spend less, cooling the economy and curbing inflation.
There are now increasing signs of economic weakness. The rise in borrowing costs has particularly weakened the housing market. Sales of both new and existing homes have fallen sharply and the pace of home construction fell in July to its lowest level since early last year. Similarly, retail sales were flat over the past month, with inflation and higher lending rates forcing many households to spend more cautiously.
Under Chair Jerome Powell, the Fed is aiming for a “soft landing,” in which the economy slows enough to reduce hiring and wage growth without triggering a recession, and brings inflation back to the Fed’s annual target of 2% . But by tightening credit, even if the economy has slowed, the Fed is increasing the risk that its rate hikes will trigger a downturn. Rising inflation and fears of a recession have shaken consumer confidence and raised public concerns about the economy.
Inflationary pressures have eased slightly in recent weeks, reflecting a steady decline in gas prices from their high peaks and lower measures of headline inflation. In July, consumer prices were up 8.5% yoy, after rising 9.1% yoy in June. And on a monthly basis, prices were flat from June to July.
Still, the costs of many necessities, notably food and rent, have shown little sign of slowing down and continue to weigh on millions of households.
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