US teetering on brink of recession as GDP contracts in second quarter

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Business and consumer sentiment has soured, while inflation is hurting sales at retailers like Walmart which earlier this week said it needed more price cuts to pare inventories.

WASHINGTON: The U.S. economy unexpectedly contracted in the second quarter, with consumer spending growing at its slowest pace in two years and business spending declining, raising the risk that the economy was on the cusp of a recession.

While the second straight quarterly decline in gross domestic product reported by the Commerce Department on Thursday largely reflected a more moderate pace of inventory accumulation by businesses due to ongoing shortages of motor vehicles, the economic profile was weak, with exports as the only bright spot.

This could deter the Federal Reserve from continuing to aggressively increase interest rates as it battles high inflation. The U.S. central bank on Wednesday raised its policy rate by another three-quarters of a percentage point, bringing the total rate hikes since March to 225 basis points.

"The economy is highly vulnerable to slipping into a recession," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. "That might discourage the Fed from ramming through another large rate hike in September."

Gross domestic product fell at a 0.9% annualized rate last quarter, the government said in its advance estimate of GDP.

Economists polled by Reuters had forecast GDP would rebound at a 0.5% rate. Estimates ranged from as low as a 2.1% rate of contraction to as high as a 2.0% growth pace. The economy contracted at a 1.6% pace in the first quarter.

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It shrank 1.3% in the first half, satisfying the definition of a "technical recession." But economists, the Fed and the White House say the economy is not in recession based on broader measures of activity.

The National Bureau of Economic Research, the official arbiter of recessions in the United States defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators."

Job growth averaged 456,700 per month in the first half of the year, while domestic demand continued to grow.

"There is without doubt an underlying slowdown in domestic demand in evidence here," said Brian Coulton, chief economist at Fitch Ratings in New York. "But this number does not signal the early arrival of the inflation and Fed-tightening induced recession that markets have recently been focused on."

The White House sought to calm voters ahead of the Nov. 8 congressional elections that will decide whether President Joe Biden's Democratic Party retains control of the U.S. Congress.

Treasury Secretary Janet Yellen touted the administration's achievements over the last 18 months, including robust employment gains following record job losses at the height of the COVID-19 pandemic, and described the economy as "resilient." Yellen, however, acknowledged that activity was slowing and warned of numerous risks on the horizon.

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