February 2, 2023

The US is entering a tech recession after a contraction in second-quarter growth

The US economy slipped into a technical recession in the second quarter, with data released by the Commerce Department on Thursday showing a contraction in the second three months of the year.

Gross domestic product fell 0.9 percent on an annualized basis in the second quarter, or 0.2 percent from the previous quarter — a measure used by other major economies. It shows GDP data for the first quarter American economy contracted by 1.6 percent.

Despite the contraction, personal consumption, which provides insight into the health of U.S. consumers, increased 1 percent, a slowdown compared to 1.8 percent in the first quarter, but still evidence of strength.

Second-quarter data was led by weaker commercial inventory growth. Many retailers said their inventories grew unusually fast last year as they restocked their shelves after supply-chain disruptions related to Covid-19 eased.

A technical recession is defined as two consecutive quarters of GDP contraction. However, the United States does not use this definition, relying instead on the determination of a panel of researchers at the National Bureau of Economic Research, based on a wide range of factors.

Nevertheless, two quarters of negative growth in a row could spook the markets. Stock market futures were lower and two-year Treasury yields fell, moving in line with interest rate expectations.

The figures come a day after the Federal Reserve report Raised interest rates 0.75 percentage points as part of an intensive campaign to control inflation. More rate hikes implemented by the central bank in recent months have begun to slow the economy, and market participants are watching closely to see if this rapid tightening will push the US into recession.

Economists say the data is unlikely to change the Fed’s calculations now. In his press conference after Wednesday’s policy meeting, Chairman Jay Powell said he does not believe the U.S. is in a recession and pointed to strength in the economy, including the labor market.

Evidence of a slowdown is yet to emerge US employment data, which is used by economists to determine whether a country is in recession. Unemployment is at 3.6 percent, the lowest level since before the coronavirus pandemic.

“GDP is a measure of economic activity, but as much as it can . . . the labor market will be a better gauge of whether we’re really heading into a recession and whether businesses are actually cutting back on hiring,” said Gregory Taco, economist at EY-Parthenon.

“I don’t think the GDP print will influence the Fed,” said Eric Winograd, an economist at AllianceBernstein.

The Atlanta Fed’s GDPNow forecast, a dynamic estimate of real GDP growth based on current economic data, predicted a contraction of 1.2 percent.