US economy shrinks again, shadow of recession looming

US gross domestic product (GDP) contracted again in the second quarter, raising the risk that the world’s largest economy could slip into recession months before a key election for Joe Biden and the Democrats.

The contraction in GDP is 0.9% on an annualized basis, a measure favored by the United States, which compares to the previous quarter and then forecasts developments for the full year, according to figures released by the Commerce Department on Thursday. After a decline of 1.6% in the first quarter, weak growth was expected. The decline in GDP over the quarter is 0.2% if we simply compare it to the previous quarter, as is the case in other advanced economies.

The commonly accepted definition of a recession is two consecutive quarters of contraction in GDP. But the current situation “doesn’t look like a recession in my opinion,” responded Joe Biden. Her Treasury Secretary Janet Yellen also stressed that the US economy remains “resilient” even if it “weakens”.

Inflation hit a new record in June at 9.1% over a year. And slowing it down will require a slowdown in economic activity. However, it is “possible to curb inflation and maintain a strong labor market,” said the minister.

“Most economists and most Americans have a similar definition of a recession: big job losses and massive layoffs,” the Treasury Secretary said at a news conference. “That’s not what we’re seeing right now,” she underscored, highlighting the more than one million jobs created in the last three months, preferring to evoke “an economy in transition towards more stable and sustained growth.

“Redefining recession”

However, the opposition castigated “Joe Biden’s recession. The economy has collapsed for two straight quarters,” the Republican Party commented on Twitter. “The administration just announced what every American has felt for almost a year — we’re in a recession,” said House Republican leader Kevin McCarthy. He also accuses Democrats of “re-defining recession (preferably) as restoring a healthy economy.”

The decline in GDP in the second quarter reflected lower business investment and household home purchases, the Commerce Department said. Governments, both federal and local, also reined in spending.

Consumption, the engine of American growth, has held up, but thanks to spending on services and especially rent, prices for which have skyrocketed with inflation. Purchases of goods have declined.

“Avoid a semantic battle”

So is the United States in recession or not? The debate, which has been raging for several days, seems to have started again. “We should avoid a semantic battle,” Yellen said. “Sometimes people use the word recession to say it’s really bad inflation.”

“We doubt the economy is in recession given the strength of the labor market,” said Lydia Boussour and Kathy Bostjancic, economists at Oxford Economics, in a statement. At 3.6%, the unemployment rate is very close to pre-pandemic levels, its lowest in 50 years, and employers are still struggling to hire new workers.

The decline in GDP “enhances stagflation (stagnation of activity and inflation) and triggers a red alert for a recession,” economist Mohamed El-Erian, president of Queens’ College at the University of Cambridge, and economist warns on Twitter Advisor to the insurer Allianz.

Only one organization in the United States has the authority to officially determine recessionary periods: the National Bureau of Economic Research (NBER). But his announcements come a few months later. We are “looking at a number of indicators,” says NBER on its website, which also monitors “the magnitude of the drop in activity.”