U.S. Economy Shrinks for a Second Quarter, Raising Recession Odds

TThe U.S. economy contracted for the second consecutive quarter. This raises chances of recession as high inflation over decades has lowered consumer spending, and Federal Reserve interest rate hikes have hampered business investment and housing demand.

Gross domestic product fell at a 0.9% annualized rate after a 1.6% decline in the first three months of the year, the Commerce Department’s preliminary estimate showed Thursday. Personal consumption, which is the largest sector of the economy, increased at an annualized 1% rate, marking a slowdown from the previous period.

A Bloomberg survey of economists found that the median forecast called for an increase in GDP by 0.4% and an increase in consumer spending by 1.2%.

The report dampened the chances of Fed rate hikes in the future, and yields on two-year Treasury bonds plummeted. Stocks continued to fall while the dollar lost its gains.

According to the details, there were decreases in government and private spending as well residential investments. The GDP was also affected by inventories.

A key gauge of underlying demand that strips out the trade and inventories components—inflation-adjusted final sales to domestic purchasers—fell at a 0.3% pace in the second quarter compared with a 2% gain in the prior period.

The report illustrates how inflation has undercut Americans’ purchasing power and tighter Federal Reserve monetary policy has weakened interest rate-sensitive sectors such as housing. This will fuel heated discussions about when and if the U.S. should enter a recession.

Although the general rule of thumb to predict recessions is two quarterly drops in GDP, it is not uncommon for a group of economists from the National Bureau of Economic Research to determine the beginning and end of business cycles.

Profit Forecasts

Target Corp. and Walmart Inc. are cutting their profits forecasts. A slew tech companies like Shopify Inc. also announced recent plans to lay off workers. Some companies like Apple Inc. and Microsoft Corp. slow down their hiring.

Broader weakness in a labor market that’s shown only limited signs of cooling would remove a key source of support for the economy and help shape the course of monetary policy later this year.

“We think it’s necessary to have growth slow down,” Fed Chair Jerome Powell said at a news conference Wednesday after another 75 basis-point hike in interest rates. “We actually think we need a period of growth below potential in order to create some slack so that the supply side can catch up. We also think that there will be, in all likelihood, some softening in labor market conditions.”

—With assistance from Kristy Scheuble and Olivia Rockeman.

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