US economy contracted in second quarter by 0.6%
31 August 2022
US economy shrank for a consecutive second quarter in April-July 2022 with its gross domestic product shrinking at an annual rate of 0.6 per cent, as per the government’s second estimate of GDP.
The contraction, however, was at a more moderate pace than expected as consumer spending blunted some of the effects of a slower pace of inventory accumulation, thereby dispelling fears of recession.
GDP growth was expected to decline by 0.9 per cent in the second quarter against a 1.6 per cent contraction in the first quarter.
While the two straight quarterly decreases in GDP meet the standard definition of a technical recession, broader measures of economic activity suggest a slow pace of expansion rather than a downturn.
A report from the Commerce Department on Thursday showed that the economy grew steadily in the last quarter in terms of income, helped in large measure by improved labour market conditions, industrial production and sales.
While the GDP growth rate in the US declined, gross domestic income, or GDI, increased by 1.4 per cent in the second quarter. GDI, which measures the economy’s performance from the income side, increased by 1.8 per cent in the first quarter.
The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, increased by 0.4 per cent in the April-June quarter, up from 0.1 per cent in the first quarter.
Incomes were boosted by higher industrial profits and wage gains amid a tight labour market conditions.
After-tax profits of companies without inventory valuation and capital consumption adjustments, conceptually most similar to S&P 500 profits, increased $284.9 billion, or by 10.4 per cent, against the 1.0 per cent growth recorded in the January-March quarter. Corporate profits were higher by 11.9 per cent year-on-year.
The more visible signs of the health of the economy like retail, production etc remain on firmer ground, which shows that the uptick is much stronger than initially reported in May, and that the trend continued through June and July.
Industrial production reached a record high in July, while inventory spending was solid. The labor market continues to churn out jobs at a brisk clip.
The National Bureau of Economic Research defines 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." But the Federal Reserve’s policy of aggressively raising interest rates to cool demand and curb inflation adds to the risk of a recession. The US central bank has hiked its policy rate 225 basis points since March.
Fed Chair Jerome Powell’s address on Friday at the annual Jackson Hole global central banking conference in Wyoming could shed more light on whether the US central bank can engineer an economic slowdown without triggering a recession.