US Economy Shrinks -0.9% In June 2022 Quarter

The fears of the US economy shrinking were already red-flagged by surveys well in advance. As the final estimates come out, the US economy shrank by -0.9% in the second June quarter, after already have shrunk in the March quarter. This is the second successive quarter of negative growth and technically, you can say that the US economy is in recession. However, US policymakers are of the view that the negative real growth is largely due to high inflation and the nominal growth in GDP is still robust. However, the reality is that the US economy has shown negative real GDP growth in the June 2022 quarter.

If you go by the final estimates of the Commerce Department, real GDP fell -0.9% in the June quarter after falling -1.6% in the March 2022 quarter. These are annualized rates presented on a quarterly basis. The government has been averse to calling it a recession, but the risk was always there once the government embarked on a relentless hawkishness drive. This has been largely driven by the artificial tightness created in the economy by the persistent rate hikes. In the post COVID scenario, the rapid growth led to runaway inflation which almost touched a 40-year high. That led to hawkishness and a slowdown in growth.

Clearly, the brakes applied by rising rates appear to be working if you look at the break-up of the growth numbers. What has actually hit the GDP growth so badly? Consumer spending, which has traditionally been the bigger driver of US growth, remained positive but slowed considerably to just 1% annualized. Even residential fixed investment dropped 14% on an annual basis. In addition, slowing business inventories represented by goods produced but not yet sold , also dragged down the GDP number. The Fed wanted to achieve a slowdown in consumer spending and now the consequences are also showing up.

Would this really qualify as an economic slowdown or a recession? In technical parlance, 2 quarters of negative GDP growth is classified as a signal that the economy has gone into recession. Even at the peak of the COVID pandemic, the US economy did see 2 consecutive quarters of negative growth, but that was dusted aside and the US economy resumed normal growth. In this case, one can always argue that the pressure comes from inflation and not so much from the side of growth. However, one thing is certain that the higher rates are weighing on underlying demand, and so next two quarters would only be muted.

However, not only the US Federal, but even Joe Biden and his team appear to be convinced that the US economy was on the right path and that they would easily come through this transition stronger and more secure. Ironically, the latest GDP numbers came exactly one day after the Fed announced another 75 basis points increase in its benchmark interest rates intended to tame rampant inflation. The US economy itself is a paradox with the jobs market remaining extremely strong but deep pressure on the global supplies worsened by the ongoing war in Ukraine pushing up the energy prices globally.

Clearly, the stock markets are far from happy with the economy report card. The Dow is down over 20% from the peaks and the NASDAQ over 30% down; both signals of an official bear market. Close to 70% of leading academic economists polled by the Financial Times UK in August predicted the US economy dip into a recession by 2023. UK and EU are not too far behind. Powell still does not believe that the US is in recession. However, the longer his policies inflict pain on growth, the less his statements would sound appealing. For now, the Fed is just obsessed with price stability and there is not much government role.