US slowdown puts economy on path to ever-more-likely recession

NEW YORK (BLOOMBERG) – The US economy is losing momentum heading into the back half of the year, highlighted by the government’s latest report card that showed weaker consumer spending and declines in business and residential investment.

While the economy shrank for a second straight quarter – meeting one rule of thumb for a recession – economists and Federal Reserve chair Jerome Powell are sceptical, largely due to a strong labour market. Still, the odds of a downturn, possibly as soon as the end of the year, are mounting as households and companies succumb to the weight of decades-high inflation and rising interest rates.

Wells Fargo economists Tim Quinlan and Shannon Seery said in a note that based on the available data, they believe “broad activity is not yet consistent with a contraction that is typically thought of as recession”, which instead would start early next year.

However, “it is undeniable that the economy is cooling”, they added.

Second-quarter gross domestic product fell an annualised 0.9 per cent after a 1.6 per cent drop in the first three months of the year, according to Commerce Department data on Thursday (July 28). Inflation-adjusted consumer outlays decelerated to the slowest pace in two years, residential investment fell the most since the onset of the pandemic and business spending cooled.

The report followed a decision by Fed policymakers on Wednesday to raise their benchmark interest rate by another 75 basis points as they try to put the hammer down on inflation at a 40-year high.

Back-to-back quarters of decline in GDP define a recession in most parts of the world, but in the United States, it is not official until economists at the National Bureau of Economic Research deem it so.

Nonetheless, the breakdown of the GDP data suggests that the economy will be fragile through the rest of the year. Several economists still see the economy growing in 2022, but the combination of persistent inflation, aggressive Fed tightening, market volatility and weakening demand are daunting hurdles.

“While we continue to see a pathway to a softish landing, it is admittedly narrowing,” economists Lydia Boussour and Kathy Bostjancic at Oxford Economics said in a note. They see real GDP growing 1.9 per cent this year.

Providing essential fuel for the economy is one of the strongest-ever labour markets, with unemployment forecast to stay near a 50-year low in July amid solid hiring and a near-record number of job openings. Jobless claims dropped last week and continuing claims, which measure Americans applying for ongoing benefits, are also near historic lows.

Some of the strength, however, is showing signs of fading as more companies lay off workers due to economic uncertainty. While applications fell, they have generally been rising and sit around the highest since November.

Amplifying the risks is a fraught geopolitical landscape as Russia’s war in Ukraine continues and sinks the euro zone economy, while leaving supply chains in disarray. Russia is clamping down the continent’s energy supplies, escalating an ongoing cost-of-living crisis.

This might be what tips the US economy over the edge, according to Mr Bill Adams, chief economist at Comerica Bank.

“Another negative shock like an energy crisis in Europe this winter would be enough to push the US into a recession,” Mr Adams said.