The US economy contracted in the second quarter amid aggressive Federal Reserve monetary policy tightening interest rates and slashing its bond-buying program, which could fan fears that the economy is already in recession.
According to data released by the Bureau of Economic Analysis, the U.S. economy contracted at 1.6% in the first quarter. Yet, estimates for the second quarter varied widely, from a 2.1% contraction to a 2% growth rate. The second-quarter GDP report will be released next month.
The second quarter-to-quarter decline in GDP meets the standard definition of a recession. But the National Bureau of Economic Research, an independent private organization that gauges economic activity, defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, visible in production, employment, and other indicators.”
With the economy showing signs of strengthening, the White House is pushing back against the recession chatter and seeking to calm voters ahead of the November 8 midterm elections, determining whether President Joe Biden’s Democratic Party retains control of Congress. The White House argues that the last time the unemployment rate was this low was before the Great Recession.
The job market has been growing at a steady pace since the beginning of the year, which is generating substantial wage gains. Still, the risks of an economic downturn have increased, and Homebuilding and house sales have weakened while business and consumer sentiment have softened in recent months.
On Thursday, U.S. Treasury Secretary Janet Yellen is preparing to hold a news conference to discuss how the economy is faring. While labor market conditions remain tight, there are signs that hiring may be picking up. Yellen said the U.S. economy added 150,000 jobs in June, the second straight month of employment gains. That’s a sign that hiring may be picking up. Yellen has also scheduled to discuss the latest economic projections for the U.S.
On Thursday, the U.S. Department of Labor released a report showing initial claims for unemployment benefits decreased by 5,000 to a seasonally adjusted 256,000 for July 23. The U.S. economy gained 241,000 jobs in July in the second quarter, the best performance in six months, as the unemployment rate held at 3.9 percent, the Labor Department said on Friday. The number of Americans filing unemployment claims decreased to 246,000 last week, the lowest level in 16 years.
According to economists, the economy has been growing at a healthy rate, and jobless claims remain below the 270,000-350,000 range, which would signal an increase in the unemployment rate. However, slowing economic growth could encourage the Federal Reserve to step back from hefty interest rate increases. Yet, much would depend on the path of inflation, which is way above the U.S. central bank’s 2% target.
The Federal Reserve raised its benchmark interest rate by a quarter of a percent, bringing the total number of rate hikes since March to 225 basis points. The move comes on the heels of the release of the second-quarter GDP report. The report revealed that the United States economy contracted by 0.2 percent in the second quarter.
The Chair of the Federal Reserve, Jerome Powell, acknowledged the softening economic activity as a result of tighter monetary policy, saying that the economy had contracted in the second quarter. Powell conceded that the U.S. economic activity had weakened during the second quarter due to tighter monetary policy. Powell pointed out that the economy had to rent for a while now, and it was not just because of a trade war and the effects of hurricanes.