What some economists and top bankers recently prophesied has now happened: the US economy is in a technical recession. Economic output fell for the second quarter in a row. In the period from April to the end of June, gross domestic product (GDP) shrank by an annualized 0.9 percent. The economy had already fallen by 1.6 percent in the first quarter.
Companies invest less
The US Department of Commerce justified the renewed decline in GDP with lower inventories and investments by companies. Added to this were falling construction spending and falling government spending. Although exports and consumer spending by private households increased, they could not compensate for the declines in other areas.
The US Federal Reserve is likely to have contributed to the downturn with its tight monetary policy. In order to combat high inflation, it has raised the key interest rate by 2.25 percentage points since March. There has never been such a rapid wave of interest rate hikes in such a short time.
Fed chief has so far ignored the risk of a recession
Yesterday, Fed Chair Jerome Powell downplayed the risk of a recession. After another sharp rate hike of 0.75 percentage points, he said he didn't think the economy was in recession. As justification, he referred to the strength of the labor market. One is close to full employment. In the first half of the year, an average of 456,700 new jobs were created per month.
Even US President Joe Biden did not see the US economy in a downturn at the beginning of the week. "In my opinion, we are not heading for a recession," he said on Monday, referring to the good figures on the labor market. The latest data, which is now showing a recession in the first half of the year, is a major setback for Biden ahead of November's midterm congressional elections. His political opponents cite the development as evidence of his supposedly misguided economic policies.
"High inflation rates, rising key interest rates and significantly worse financing conditions are a burden," said economist Bastian Hepperle from Hauck Aufhäuser Lampe Privatbank. That spoils the mood for consumption, and companies cut their investment and hiring plans. "The prospects are anything but rosy."
Economists: "Not a real recession"
Other economists were less pessimistic. Commerzbank expert Bernd Weidensteiner spoke of a technical, but not of a broad-based recession. He referred to the National Bureau of Economic Research (NBER), which, in addition to GDP development, also considers other economic variables such as the labor market and currently sees no real recession. "The US economy is in a technical recession, without the economy actually being in a phase of economic contraction according to official announcements," agrees Thomas Gitzel, Chief Economist at VP Bank. The Fed will not be disturbed by this and will remain on course to hike interest rates.
Fed Chair Powell yesterday signaled another big rate hike of 0.75 percentage point in September. He reiterated that an interest rate level of three to 3.5 percent at the end of the year was a desirable monetary policy level. Only after that, i.e. from 2023, did the Fed signal a slower pace.
US growth figures are extrapolated for the year, i.e. annualized. They are therefore not directly comparable with growth data from Europe, where this is not the case. To approximate a growth rate comparable to Europe, you would have to divide the US rate by four.