Inventories have stockpiled and consumers have restrained purchases. that’s all.
Biden, Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell have all dismissed inflation as transitory. Now they are insisting we are not in a recession and that Americans should not judge the economy by the GDP and inflation.
“There is going to be a lot of chatter today on Wall Street and among pundits about whether we are in a recession,” Biden said, adding: “But if you look at our job market, consumer spending, business investment, we see signs of economic progress in the second quarter as well.”
In fact, just after the GDP figure was released on Thursday, the President issued a statement touting the strong labour market, saying that the nation is “on the right path and will come through this transition stronger and more secure”.
“Let me point out that GDP growth and price stability are two of the three goals of economic policy. The third is full employment,” he said, adding to an earlier statement that denied recession.
Negative growth and high inflation affect nearly all Americans. Unemployment affects only the extra 3 per cent or 4 per cent of the population who lose their jobs when unemployment rises in a recession. Obviously, then, growth and inflation are the best indicators to judge economic performance because every American feels higher prices daily. With no growth, there is no expansion of opportunities for American households.
This is the first time in four decades that economic growth is negative, and inflation is approaching double digits. In the recessions of 1991, 2001, 2008 and 2020, economic growth was negative, but inflation was generally in the 2 per cent to 3 per cent range or less.
A condition where the economy is experiencing high inflation and a stagnant, no-growth economy, is called stagflation. Even if Biden tries to convince the public that we are not in a recession, the economy is not growing, which means the economy is stagnant. We are experiencing stagflation, economic analysts pointed out.
The economic policy cure for stagflation is difficult. If the policy is geared toward ending the recession by increasing demand, that will tend to make inflation worse. If the primary goal is to reduce inflation by decreasing demand, that will tend to slow growth and make the recession worse, they said.
The Federal Reserve had raised interest rates by 75 basis points to rein in the double digit inflation of 13 per cent , the steepest in recent years, as the central bank usually raises interest rates only by 25 basis points in graded steps. The first raise was by 50 basis points in June.
GDP, the broadest measure of goods and services produced across the economy, shrank by 0.9 per cent on an annualised basis in the three-month period from April through June this year, the Commerce Department said in its first reading of the data on Thursday.
Definitive economists expected the report to show the economy had expanded by 0.5 per cent.
“Coming off of last year’s historic economic growth, and regaining all the private sector jobs lost during the pandemic crisis, it’s no surprise that the economy is slowing down as the Federal Reserve acts to bring down inflation,” Biden said on Thursday.
“But even as we face historic global challenges, we are on the right path and we will come through this transition stronger and more secure.”
Biden touted the job market, saying it “remains historically strong, with unemployment at 3.6 per cent and more than 1 million jobs created in the second quarter alone. Consumer spending is continuing to grow”.
On Wednesday, the President had said that he met the chairman of SK Group from Korea earlier this week, saying it is “just one of the companies investing more than $200 billion in American manufacturing since I took office, powering a historic recovery in American manufacturing”.
“My economic plan is focused on bringing inflation down, without giving up all the economic gains we have made. Congress has an historic chance to do that by passing the CHIPS and Science Act and Inflation Reduction Act without delay.”
Meanwhile, Treasury Secretary Yellen on Thursday suggested the US economy is not in a recession, despite new figures that showed two consecutive declines in gross domestic product, the unofficial signal that a downturn has started.
Most economists define a true recession as involving a “broad-based weakening of the economy”, including substantial job losses, business closures and a decline in private sector activities, Yellen told media persons “that is not what we’re seeing right now”.
Her comments came hours after the Commerce Department reported that the GDP, the broadest measure of goods and services produced across the economy, shrank by 0.9 per cent on an annualized basis in the three-month period from April through June.
Economic output already fell over the first three months of the year, with the GDP tumbling 1.6 per cent.
Recessions are technically defined by two consecutive quarters of negative economic growth and are characterised by high unemployment, low or negative GDP growth, falling income and slowing retail sales, according to the National Bureau of Economic Research (NBER), which tracks downturns.
With back-to-back declines in growth, the economy meets the technical criteria for a recession, which requires a “significant decline in economic activity that is spread across the economy and that lasts more than a few months”.
Still, the NBER, the semi-official arbiter, may not confirm it immediately as it typically waits up to a year to call it.
CNN in a report said that the hotly anticipated data release has taken on outsized significance as investors, policymakers and ordinary Americans seek some measure of clarity in the current muddled economic environment.
The negative dip shown in Thursday’s first read on second-quarter GDP activity — data that will be revised two more times — was driven mostly by a decline in inventory levels. Businesses in recent quarters have tried to replenish stockpiles drawn down during the pandemic — and in trying to adjust for supply chain upheaval, they’ve found themselves overstocked at a time when consumers have pulled back on some purchases.
Investments made in inventory during the second quarter were therefore lower than they were in the first quarter.
“The general takeaway is the economy is slowing, and that’s what the (Federal Reserve) wants,” said Ryan Sweet, who leads real-time economics at Moody’s Analytics. “We’re not in a recession.”
The White House has been adamant that the world’s largest economy, despite being buffeted by decades-high inflation and a cascade of supply shocks, remains fundamentally sound.
The non-profit National Bureau of Economic Research is the official arbiter of recessions, and it is unlikely to render a verdict any time soon. The group’s Business Cycle Dating Committee typically weighs a plethora of statistics over a period of months before making a determination.
“They have a much stricter definition: It’s a broad-based and persistent weakness in the economy,” Sweet said. “And this isn’t broad based. It’s really concentrated in inventories and in trade — trade was a big drag on first-quarter GDP.”
Additionally, the labour market is doing well, he said. Monthly job gains average more than 450,000 through the first six months of this year, according to the Bureau of Labor Statistics. However, while those gains are moderating, as anticipated, the past few weeks have also seen jobless claims increase.
On Thursday, the latest weekly jobless claims data from the BLS showed that first-time claims for unemployment benefits were an estimated 256,000 for the week ending July 23. That total is 5,000 below the previous week’s level, which was revised upward by 10,000 claims to 261,000.
“Jobless claims have definitely moved higher from their cyclical lows,” Sweet said. “I think that’s more of a reflection of an economy shifting into a lower gear.”
Economists say the biggest reason it would be premature to call a recession based on Thursday’s numbers is that the data can and probably will change. Subsequent revisions to first-quarter GDP figures, for instance, changed from an initial drop of 1.4 per cent to 1.6 per cent, and Thursday’s numbers are just the first of three estimates.
Eric Freedman, chief investment officer at US Bank Wealth Management, said: “New information can emerge. And when it does, those variables change the outcome. A rush to load up on goods during the previous two quarters was a miscalculation for companies like big-box stores. Walmart and Target have both told investors they expect to cut prices in order to move products. But from a macroeconomic perspective, some experts think those missteps imply that the economy in the first quarter wasn’t as anemic as the drop in GDP might otherwise imply.”
Federal Reserve Chairman Jerome Powell had on Wednesday reiterated the importance of considering various key economic measures as the central bank determines future rate moves. However, Powell said the first read of a GDP report should be taken “with a grain of salt”.
JPMorgan said: “Despite a second consecutive quarter of negative GDP growth for 2Q, we do not believe the US slipped into recession earlier this year given nonfarm payroll growth averaged 375K per month during 2Q.”
US economic and finance research institutions believe that despite facing challenges at the domestic level along with a rapidly transforming global landscape, the US economy is still the largest and most important in the world. The US economy represents about 20 per cent of total global output, and is still larger than that of China.
Moreover, according to the IMF, the US has the sixth highest per capita GDP (PPP).
The US economy features a highly-developed and technologically-advanced services sector, which accounts for about 80 per cent of its output.
It is dominated by services-oriented companies in areas such as technology, financial services, healthcare and retail. Large American corporations also play a major role on the global stage, with more than a fifth of companies on the Fortune Global 500 coming from the US.