U.S. economy shrank at annual rate of 0.9% in the second quarter

The U.S. economy shrank between April and June of this year, marking the second consecutive quarter of declining economic activity — a sign the U.S. may be teetering on the edge of a recession. 

The nation’s gross domestic product, a measure of total spending on goods and services across the economy, fell at an annual rate of 0.9%, the Commerce Department said Thursday.

The contraction follows a 1.6% decline in economic activity in the first three months of the year and means the U.S. could currently be in a recession, which is broadly defined as two straight quarters of negative growth.

The hottest inflation in 40 years is crimping household budgets, with some consumers struggling to cover basics such as gasoline, food and rent, which have sharply risen in price from a year ago. 

At the same time, the Federal Reserve on Wednesday raised nterest rate for the fourth time this year in an effort to dampen inflation. But that is also making it more expensive for consumers and businesses to borrow for big purchases like homes and cars.

Job market remains sturdy

The economy is showing signs of strength in other areas, such as job growth, which makes it harder to assess whether the nation has slipped into a recession, economists said.

“The 0.9% annualized fall in GDP in the second quarter is disappointing but doesn’t mean the economy is in recession,” Andrew Hunter, senior U.S. economist with Capital Economics, said in a report. “The decline was partly due to a huge drag from inventories, while most other coincident indicators, particularly employment, show continued expansion.”

The U.S. is facing ongoing headwinds as inflation remains high and the fallout from Russia’s war in Ukraine threatens to depress economic growth for the rest of the year. The Fed’s series of rate hikes are expected to help lower inflation, but the sharp increases risk snuffing out growth and destabilizing the job market as businesses cut back on hiring. 

In the second quarter, GDP was impacted by decreases in investment in private inventory, residential fixed investment and government spending. Americans held off on purchases, reducing spending at retailers as well as car dealers, the Commerce Department said. 

Gas prices have been falling since hitting a record high in June, which should ease the pressure on motorists, economists note. But households and businesses will still be coping with higher costs of borrowing due to the Fed rate hikes.

“While falling energy prices and a more general easing of inflation should give real incomes a boost over the coming months, we expect consumption growth to remain subdued,” Hunter said.