[Summary] US Economy Contracts for 2 Consecutive Quarters, Biden Says "Just a Slowdown"... Recession Debate Heats Up

[Image source=AP Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The U.S. economy has ultimately recorded negative growth for two consecutive quarters as feared, intensifying the controversy surrounding a 'recession.' Ahead of the midterm elections in November, President Joe Biden dismissed recession concerns by highlighting solid economic indicators such as employment, consumption, and investment. However, with the Federal Reserve's ongoing tightening to curb inflation and recent consumption indicators showing signs of slowdown, market concerns are expected to grow.

◆U.S. Records Two Consecutive Quarters of Negative Growth...Biden Draws Line on Recession

According to the White House, President Biden issued a statement on the 28th (local time) immediately after the announcement that the second-quarter gross domestic product (GDP) growth rate was -0.9% annualized, saying, "It is not surprising that the economy is slowing down after moving away from last year's historic level of economic growth and fully recovering the private sector jobs lost during the pandemic crisis." He explained that this slowdown in growth is not an official entry into a recession but a result of the tightening process aimed at lowering inflation.

The second-quarter GDP released that day recorded negative growth for two consecutive quarters, following -1.6% in the first quarter. Typically, two consecutive quarters of negative growth are considered a technical recession. By this standard, the U.S. economy is experiencing a recession for the first time in two years since the COVID-19 pandemic fully took hold in the first and second quarters of 2020. The BEA stated that the decline was due to a broad range of factors, including decreases in business investment, residential fixed investment, federal and state and local government spending, and nonresidential fixed investment.

However, although the technical recession criteria have been met, the U.S. economy has not officially entered a recession. In the U.S., the National Bureau of Economic Research (NBER) reviews comprehensive economic conditions to make a later determination on whether a recession has occurred. According to the NBER, a recession is defined as "a significant decline in economic activity spread across the economy lasting more than a few months." The NBER, composed of eight economists, evaluates eight major economic indicators, including GDP, labor statistics, consumer spending, and industrial production. The Biden administration has emphasized that the current situation cannot be considered a recession, citing strong labor markets ahead of GDP announcements.

On the same day, President Biden also highlighted the unemployment rate near a 50-year low and job growth. He said, "The unemployment rate is only 3.6%, and more than one million jobs were created in the second quarter alone," adding, "The job market remains historically strong, and consumer spending continues to increase."

He also cited manufacturing investment as an economic achievement. Referring to SK Group's investment in the U.S., he said, "It is one of the companies that have invested more than $200 billion in U.S. manufacturing since I took office." He explained that such manufacturing investments are fueling the historic recovery of U.S. manufacturing.

President Biden emphasized, "We face historic global challenges, but we are on the right path and will navigate this transition stronger and safer." At a press conference on the same day regarding the 'Inflation Reduction Act,' he highlighted economic achievements, saying, "Since taking office, we have created nine million jobs, and companies are investing in the U.S. at record rates." He added, "This situation does not look like a recession to me."

Economists who argue that the indicators cannot be considered a real recession emphasize that past recessions were marked by high unemployment rates and sharp declines in industrial production. However, the main defense is that the current labor market remains strong. U.S. Treasury Secretary Janet Yellen also drew a line during a press conference that day, saying, "We are witnessing a clear slowdown in economic growth," but "a recession refers to a broad and widespread weakening of the economy, which is not currently happening." Secretary Yellen assessed that various indicators, including the labor market, household income, and industrial growth, are not bad.

Employment increased by 1.1 million in the second quarter, contrasting with the 240,000 job losses in the first three months of the previous recession. The U.S. unemployment rate has remained at 3.6% for four consecutive months, near a 50-year low. Wages are also on the rise. The weekly initial jobless claims in the U.S. (256,000) released that day also turned to a downward trend after four weeks.

Although consumer spending, which accounts for two-thirds of the U.S. economy, is slowing, it still recorded a positive growth of 1.0% in the second quarter, which is one of the reasons why it is difficult to define the economy as having entered a recession. There are also indications that the decline in corporate inventory investment and the worsening trade balance, which were the biggest factors pulling down the first half GDP, are temporary.

The New York Times (NYT) reported after the GDP announcement that "most economists still judge that the official definition of a recession has not yet been met." Aneta Markowska, chief financial economist at Jefferies, said, "We are in a 'psychological recession.' I do not think we are in an actual recession," and predicted, "Growth will accelerate once the growth slowdown caused by the inflation shock weakens."

◆Pessimism of "Recession Imminent" Also Continues

On the other hand, pessimism that a recession is imminent is also growing. The downside risks that had been feared are materializing faster than expected. The strong labor market claimed by the Biden administration is also expected to deteriorate soon.

In particular, the large interest rate hikes implemented by the central bank to lower inflation will inevitably raise unemployment and dampen consumption, putting a damper on the overall economy. According to a recent survey released by CNBC, 63% of respondents answered "yes" to the question, "Do you think the Fed's efforts to lower inflation will cause a recession?" Signs of a rapid cooling are already being observed in interest rate-sensitive sectors such as construction and real estate.

Since entering the rate hike cycle in March, the Fed has raised the benchmark interest rate by a total of 2.25 percentage points over four months. Especially in June and July, it took consecutive giant steps by raising rates by 0.75 percentage points at a time, showing an aggressive stance. Moreover, Chairman Powell has left open the possibility of another giant step in September depending on inflation and other data.

Jim Bird, Chief Investment Officer at Plant Moran Financial Advisors, pointed out, "The path for the Fed to raise rates without pushing the economy into a recession has become narrower," adding, "The door may already be closed." Aditya Barve, senior economist at Bank of America (BoA), said, "I still think we have not entered a recession," but warned, "We need to pay attention to the underlying trend of weakening domestic demand."

The International Monetary Fund (IMF) recently lowered its U.S. growth forecast for this year by 1.4 percentage points to 2.3% and warned of the possibility of a recession. In an early-month Politico poll, 65% of voters already responded that the economy is in a recession. In the New York bond market, the inversion of short- and long-term Treasury yields, considered a precursor to recession, continues.

Economic media CNBC reported, "Most economists do not expect an official recession declaration from the NBER despite consecutive negative growth," but added, "Wall Street is rather expecting a recession later this year or in 2023."

This content was produced with the assistance of AI translation services.