U.S. economy shrinks at 0.6% annual rate in Q2

Battered by surging consumer prices and rising interest rates, the U.S. economy shrank at a 0.6% annual rate from April through June, the government announced Thursday, unchanged from its previous second-quarter estimate.

It marked the second consecutive quarter of economic contraction, one informal rule of thumb for a recession. Most economists, citing a strong and resilient American job market, believe the world’s biggest economy is not yet in a downturn. But they worry that it might be headed for one as the Federal Reserve ratchets up interest rates to combat inflation.

Consumer spending grew at a 2% annual rate, but that gain was offset by a drop in business inventories and housing investment.

The U.S. economy has been sending out mixed signals this year. Gross domestic product, or GDP, went backward in the first half of 2022. But the job market has stayed strong. Employers are adding an average 438,000 jobs a month this year, on pace to be the second-best year for hiring (behind 2021) in government records going back to 1940. Unemployment is at 3.7%, low by historic standards. There are currently about two jobs for every unemployed American.

But the Fed has raised interest rates five times this year — most recently Sept. 21 — to rein in consumer prices, which were up 8.3% in August from a year earlier despite plummeting gasoline prices. Higher borrowing costs raise the risk of a recession and higher unemployment. “We have got to get inflation behind us,” Fed Chair Jerome Powell said last week. “I wish there was a painless way to do that. There isn’t.”

The risk of recession — along with persistently and painfully high prices — poses an obstacle to President Joe Biden’s Democrats as they try to retain control of Congress in November’s midterm elections. However, drops in gasoline prices have improved consumers’ spirits in the past two months.

Thursday’s report was the Commerce Department’s third and final take on second-quarter growth. The first look at the economy’s July-September performance comes out Oct. 27. Economists, on average, expect that GDP returned to growth in the third quarter, expanding at a modest 1.5% annual pace, according to a survey by the data firm FactSet.

Commerce also on Thursday released revised numbers for past years’ GDP. The update showed that the economy performed slightly better in 2020 and 2021 than previously reported. GDP rose 5.9% last year, up from the previously reported 5.7%; and, pounded by the coronavirus pandemic, it shrank 2.8% in 2020, not as bad as the 3.4% previously on record.

Paul Wiseman, The Associated Press

Paul Wiseman is a reporter with The Associated Press,  an American not-for-profit news agency headquartered in New York City and founded in 1846.