Inflation has been at the top for decades, reduced consumer spending, and Federal Reserve interest rate hikes that have held back business investment and housing demand. A gloomy scenario that led the US economy to contract for the second consecutive quarter, thus entering a technical recession.
The reaction of the markets has been moderate with Wall Street preparing to open close to parity. Stronger the reaction of the Treasuries, with the US ten-year which saw the yield fall to 2.667%, the lowest since April 14th.
Investors may read these signs of economic weakness as an important factor in holding back the Fed’s action which may be less aggressive in the future after the two 75bp hikes in recent meetings.
In detail, gross domestic product fell at an annualized rate of 0.9% after a decline of 1.6% in the first three months of the year, according to the preliminary estimate of the US Department of Commerce. Personal consumption, the most important part of the economy, grew at a rate of 1%, decelerating compared to the first three months. The average projection of a Bloomberg survey of economists predicted a 0.4% increase in GDP and 1.2% in consumer spending.
Details of the report showed a decline in corporate and government spending and residential investment. A key indicator is inflation-adjusted final sales to domestic buyers which fell 0.3% in the second quarter, versus 2% in the previous period.
Inflation has dented the purchasing power of Americans and the Federal Reserve’s tighter monetary policy weakened interest rate sensitive sectors such as housing. This weakness is likely to fuel an already heated debate about whether or when the US will enter a recession.
Although the common rule of thumb for recessions is two consecutive quarterly GDPs, the official determination of the end and start of the recession is made by a team of academics from the National Bureau of Economic Research.