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US economy enters technical recession


The GDP numbers defied expectations, with experts predicting 0.5% growth.

This followed a contraction of 1.6% in the first quarter of this year putting the US into a technical recession by global standards.

However, the US approaches recession differently, arguing it is not determined by two consecutive quarters of negative growth, as is the case in the UK and much of the rest of the world. Instead, the National Bureau of Economic Research determines recession based on a range of factors such as GDP, real income and employment.

The NBER has not yet designated the US economy as being in recession.

Fed makes further 75 basis points hike in bid to tame inflation

Nevertheless, two quarters of negative GDP growth have already spooked markets. The two-year treasury yields plunged, already weakened by the Federal Reserve raising interest rates by 0.75% yesterday (27 July) in an attempt to combat runaway inflation.

Despite the contraction in growth, personal consumption actually grew by 1%, compared to 1.8% growth in the previous quarter.

The White House has pushed back on the idea that the US is in a recession as the midterm elections approach.

“When you are creating almost 400,000 jobs a month, that is not a recession,” said treasury secretary Janet Yellen in an interview on Sunday.

65% of Americans already believed the country was in a recession before the latest GDP numbers were revealed, according to a recent Morning Consult poll.

Seema Shah, chief strategist at Principal Global Investors, said: “Policymakers will no doubt be tying themselves in knots trying to explain why the US economy is not in recession. However, they make a strong point. While two consecutive quarters of negative growth is technically a recession, other timelier economic data are not consistent with recession. Certainly, with two job openings per unemployed worker and an average 375,000 jobs being added per quarter, the labour market is a picture of strength.

“That is not to say the US economy is not slowing. With excess savings being whittled down, consumers are being more price sensitive and more deliberate with purchases, while companies are facing greater margin pressures.

“Throw in the most aggressive Fed tightening cycle since the 1980s, and a recession in early 2023 is highly likely.”

Richard Flynn managing director at Charles Schwab UK added: “Today’s announcement is concerning and reflects weaknesses in the stock market and the outlook for corporate profit margins. The US economy and stock market both struggled in the first half of 2022, as tighter monetary policy, faster inflation and slower growth dented consumer and business confidence.

“The Fed doled out trillions of dollars worth of liquidity during the pandemic, boosting the economy. However, it is now aggressively raising interest rates in a bid to control inflation, meaning that liquidity has dried up. Tightening financial conditions point to a meaningful economic slowdown. Today’s announcement underscores this risk.”