The United States recorded a 0.9% contraction in its Gross Domestic Product (GDP) for the second quarter of 2022, following a 1.6% annual decline in the first quarter, according to data released on July 28, 2022.
This marks two consecutive quarters of negative GDP growth, meeting the technical definition of a recession, though the US relies on the National Bureau of Economic Research (NBER) to officially designate a recession based on multiple economic indicators.
Drivers of Economic Downturn
The economic contraction was primarily driven by weaker business inventory growth, exacerbated by a global energy crisis that has fueled a sharp rise in prices for goods and services.
The US Bureau of Labor Statistics reported a 40-year high inflation rate of 9.1% in June 2022, with significant increases in gasoline, food, and shelter costs.
Despite the downturn, personal consumption—a key indicator of consumer health—grew by 1% in Q2, down from 1.8% in Q1, signaling resilience among US consumers.
Federal Reserve’s Response
In response to soaring inflation, the US Federal Reserve, led by Chair Jerome Powell, has prioritized curbing price increases, even at the risk of further economic slowdown.
The Federal Open Market Committee unanimously raised the policy lending rate to a range of 2.25% to 2.5% in July 2022, up from near zero at the start of the year.
Powell emphasized the Fed’s commitment to continue rate hikes until inflation trends toward the 2% target, underscoring a hawkish stance to stabilize the economy.
Labor Market Stability
Despite the GDP contraction, the US employment rate remained robust at 3.6%, the lowest since before the COVID-19 pandemic, indicating a strong labor market amid economic challenges.
Defining a Recession
While two consecutive quarters of GDP decline typically define a recession, the US relies on the NBER, a non-profit, non-partisan organization, to make this determination.
The NBER’s committee of eight economists considers various factors beyond GDP, such as employment, income, and industrial production, to assess the economy’s status.
Broader Context
The US economic challenges reflect global pressures, with the energy crisis contributing to inflationary trends worldwide.
