Fears of US going into recession as economy contracts for second consecutive quarter

The world’s largest economy has contracted for a second consecutive quarter, although the downturn is yet to be officially termed a recession.

The US recorded a 0.9% decline in output on an annualised basis between April and June when economists had forecast an increase of 0.5%.

The early data would meet the international criteria for a recession because the first quarter also saw a contraction – of 1.6%.

But the country has an official arbiter of recessions – the National Bureau of Economic Research – and it is yet to make such a judgement.

It defines a recession as a “significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators”.

The labour market remains tight, with job growth averaging 456,7000 per month in the first half of the year, and the number of new claims for state unemployment benefits decreasing in the week ending 23 July.

Wall Street’s main indexes opened flat – the Dow Jones Industrial Average rose 0.03 points, the S&P 500 gained 2.52 points – or 0.06%, while the Nasdaq was up 4.06 points – or 0.03%.

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‘The next few months will be crucial’

Rob Clarry, investment strategist at wealth manager Evelyn Partners, said that the economic contraction was driven by weak readings for investment, government spending and inventories, although consumer spending – an important indicator of underlying growth – held up.

“The NBER is tasked with deciding this and the indicators it tracks include real personal income minus government transfers, employment, various forms of real consumer spending, and industrial production.

“None of these indicators are pointing towards a recession at this moment in time.”

“The Federal Reserve continues to face a challenging balancing act in bringing down inflation without damaging economic growth – and this data points to an increasingly narrow path for a soft landing.

“The next few months will be crucial in seeing whether inflation eases.

“If it remains elevated, we will see the Fed continue to prioritise inflation at the expense of growth, which will push the US economy closer to a broader economic slowdown.”

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