The decline that the Commerce Department reported Thursday in the gross domestic product — the broadest gauge of the economy — followed a 1.6 per cent annual drop from January through March. Consecutive quarters of falling GDP constitute one informal, though not definitive, indicator of a recession.
The GDP report for last quarter pointed to weakness across the economy. Consumer spending slowed as Americans bought fewer goods. Business investment fell. Inventories tumbled as businesses slowed their restocking of shelves, shaving 2 percentage points from GDP.
U.S. economy is not in a recession right now: Powell
Higher borrowing rates, a consequence of the Federal Reserve’s series of rate hikes, clobbered home construction, which shrank at a 14 per cent annual rate. Government spending dropped, too.
The report comes at a critical time. Consumers and businesses have been struggling under the weight of punishing inflation and higher borrowing costs. On Wednesday, the Federal Reserve raised its benchmark interest rate by a sizable three-quarters of a point for a second straight time in its push to conquer the worst inflation outbreak in four decades.
The Fed is hoping to achieve a notoriously difficult “soft landing”: An economic slowdown that manages to rein in rocketing prices without triggering a recession.
Fed Chair Jerome Powell and many economists have said that while the economy is showing some weakening, they doubt it’s in recession. Many of them point, in particular, to a still-robust labor market, with 11 million job openings and an uncommonly low 3.6 per cent unemployment rate, to suggest that a recession, if one does occur, is still a ways off.
“The back-to-back contraction of GDP will feed the debate about whether the U.S. is in, or soon headed for, a recession,” said Sal Guatieri, senior economist at BMO Capital Markets. “The fact that the economy created 2.7 million payrolls in the first half of the year would seem to argue against an official recession call for now.”
Still, Guatieri said, “the economy has quickly lost steam in the face of four-decade high inflation, rapidly rising borrowing costs and a general tightening in financial conditions.”
U.S. economy is not in a recession right now: Powell
In the meantime, Congress may be moving toward approving action to fight inflation under an agreement announced Wednesday by Senate Majority Leader Chuck Schumer and Sen. Joe Manchin, a West Virginia Democrat. Among other things, the measure would allow Medicare to negotiate prescription drug prices with pharmaceutical companies, and the new revenue would be used to lower costs for seniors on medications. The measure would also extend subsidies that were provided early in the pandemic to help some Americans who buy health insurance on their own.
In the wake of Thursday’s second straight negative GDP report, Biden downplayed the news, pointing to continued low unemployment and strong hiring.
“Coming off of last year’s historic economic growth — and regaining all the private sector jobs lost during the pandemic crisis — it’s no surprise that the economy is slowing down as the Federal Reserve acts to bring down inflation,” the president said in a statement. “But even as we face historic global challenges, we are on the right path and we will come through this transition stronger and more secure.”
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Thursday’s first of three government estimates of GDP for the April-June quarter marks a drastic weakening from the 5.7 per cent growth the economy achieved last year. That was the fastest calendar-year expansion since 1984, reflecting how vigorously the economy roared back from the brief but brutal pandemic recession of 2020.
But since then, the combination of mounting prices and higher borrowing costs have taken a toll. The Labor Department’s consumer price index skyrocketed 9.1 per cent in June from a year earlier, a pace not matched since 1981. And despite widespread pay raises, prices are surging faster than wages. In June, average hourly earnings, after adjusting for inflation, slid 3.6 per cent from a year earlier, the 15th straight year-over-year drop.
The inflation surge and fear of a recession have eroded consumer confidence and stirred public anxiety about the economy, which is sending frustratingly mixed signals. And with the November midterm elections nearing, Americans’ discontent has diminished President Joe Biden’s public approval ratings and increased the likelihood that the Democrats will lose control of the House and Senate.
Consumer spending is still growing. But Americans are losing confidence: Their assessment of economic conditions six months from now has reached its lowest point since 2013, according to the Conference Board, a research group.
Is the U.S. in recession?
Recession risks have been growing as the Fed’s policymakers have pursued a campaign of rate hikes that will likely extend into 2023. The Fed’s hikes have already led to higher rates on credit cards and auto loans and to a doubling of the average rate on a 30-year fixed mortgage in the past year, to 5.5 per cent. Home sales, which are especially sensitive to interest rate changes, have tumbled.
Even with the economy recording a second straight quarter of negative GDP, many economists do not regard it as constituting a recession. The definition of recession that is most widely accepted is the one determined by the National Bureau of Economic Research, a group of economists whose Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
The committee assesses a range of factors before publicly declaring the death of an economic expansion and the birth of a recession — and it often does so well after the fact.
This week, Walmart, the nation’s largest retailer, lowered its profit outlook, saying that higher gas and food prices were forcing shoppers to spend less on many discretionary items, like new clothing.
Manufacturing is slowing, too. America’s factories have enjoyed 25 consecutive months of expansion, according to the Institute for Supply Management’s manufacturing index, though supply chain bottlenecks have made it hard for factories to fill orders.
But now, the factory boom is showing signs of strain. The ISM’s index dropped last month to its lowest level in two years. New orders declined. Factory hiring dropped for a second straight month.
How to prepare for a recession
© 2022 The Canadian Press
Poverty, inflation, fear: Egypt's economy pushed to brink – CityNews Toronto
Brazilians’ Outlook on Economy Improves Ahead of Vote – BNN Bloomberg
(Bloomberg) — Brazilians’ views on the economy are improving amid stronger-than-expected activity and easing inflationary pressures.
The number of voters who believe the economy is doing better now is as high as before the onset of the Covid-19 pandemic, local newspaper Folha de Sao Paulo reported on Sunday, based on the latest Datafolha poll. In the survey, 28% of respondents say the economic outlook has improved, up from 25% in August and 15% in June. Still, 50% believe activity has worsened in the last few months.
Latin America’s largest economy is witnessing the first signs of easing inflationary pressures. Consumer prices fell back to single digits in August, after tax cuts on gasoline prices kicked in and commodity prices declined. Activity is proving resilient to an aggressive monetary tightening campaign, as unemployment fell for five consecutive months amid stronger-than-forecast growth in the second quarter.
President Jair Bolsonaro’s voters have a more positive view on the economy, with 64% saying there’s an improvement in recent months. Only 7% think alike among those who favor former president Luiz Inacio Lula da Silva, still the favorite ahead of presidential elections.
Read More: Bolsonaro Becomes Main Target in Brazil Debate Without Lula
The economy remains one of the top concerns for Brazilians as they head to the polls on Oct. 2. Trying to improve his chances of reelection, the incumbent pushed a multibillion social package that included boosted paychecks to the poor. Still, 55% of those who received the aid believe the economic outlook is worse now, with 46% saying their personal situation also worsened in recent months.
Read More: Bolsonaro, Lula Battle for Votes in Brazil’s Largest State (2)
Both Bolsonaro and Lula are focusing on populous regions of the country in the week before the election day. Bolsonaro is continuing to reach out to female voters, while Lula is facing a tough fight with his opponent among evangelical groups.
©2022 Bloomberg L.P.
Poverty and inflation: Egypt's economy hit by global turmoil – Yahoo Canada Finance
DUBAI, United Arab Emirates (AP) — Stores are selling winter clothes from last season in the middle of summer. Repair shops lack spare parts for appliances. There’s a waiting list to buy a new car.
Egypt, a country of more than 103 million people, is running low on foreign currency needed to buy essentials like grain and fuel. To keep U.S. dollars in the country, the government has tightened imports, meaning fewer new cars and summer dresses.
For the nearly third of Egyptians living in poverty, and the millions more in poor conditions, the country’s economic woes mean life is much harder than off-season shopping — they’re finding it harder to put food on the table. A decade after deadly protests and political upheaval rocked the Middle East’s most populous nation, the economy is still staggering and has taken new hits.
Fatima, a 32-year-old cleaner in Cairo, says her family stopped buying red meat five months ago. Chicken also has become a luxury. She’s borrowing from relatives to make ends meet.
She’s worried about the impact of high prices on Egypt’s social fabric. Asking to be identified only by her first name for fear of reprisal, she worries that crime and theft will increase “because people won’t have enough money to feed themselves.”
For decades, most Egyptians have depended on the government to keep basic goods affordable, but that social contract is under pressure due to the impact from Russia’s war in Ukraine. Egypt has sought loans to pay for grain imports for state-subsidized bread. It’s also grappling with surging consumer prices as the currency drops in value. The threat of food insecurity in the world’s largest importer of wheat, 80% of which comes from the war-torn Black Sea region, has raised concerns.
“In terms of, like, bread in exchange for freedom, that contract got violated a long time ago,” said Timothy Kaldas, an economic expert at the Tahrir Institute for Middle East Policy.
Annual inflation climbed to 15.3% in August, compared with just over 6% in the same month last year. The Egyptian pound recently hit a record low against a strengthening U.S. dollar, selling at 19.5 pounds to $1. That has widened trade and budget deficits as foreign reserves needed to buy grain and fuel plunged by nearly 10% in March, shortly after Russia’s invasion sent commodity prices soaring and investors pulled billions of dollars from Egypt.
Egypt has few options to deal with the hole in its finances. As with previous crises, it’s turned to Gulf Arab allies and the International Monetary Fund for a bailout.
A new IMF loan would buoy Egypt’s dwindling foreign reserves, which have fallen to $33 billion from $41 billion in February. A new loan, however, will add to Egypt’s ballooning foreign debt, which climbed from $37 billion in 2010 — before the Arab Spring uprisings — to $158 billion as of March, according to Egyptian central bank figures.
Leaders blame the challenges on the coronavirus pandemic, which hurt the vital tourism industry, and price shocks sparked by the war in Ukraine. They’ve also faulted revolutionaries and those who may have backed the Muslim Brotherhood.
“Why don’t you want to pay the cost of what you did in 2011 and 2013?” President Abdel Fattah el-Sissi said in televised remarks this month. “What you did — didn’t that negatively impact the economy?”
He was referring to protests, which toppled Egypt’s longtime president, ushered in a divisive Muslim Brotherhood presidency, and resulted in a populist-backed power grab by the military and el-Sissi’s ascension to the presidency.
The former military general said the fallout from those years cost Egypt $450 billion — a price, he said, everyone must bear.
“We solve the matter together. I am saying this to all Egyptians … we are going to finish this matter together and pay its price together,” he said.
Critics, however, argue the government has squandered chances to make real reforms and is overspending on superfluous mega-projects as it builds a new administrative capital. The government has touted the construction boom as a job producer and economic engine.
The state’s hold over the economy and the “outsized role of military-related enterprises” have historically crowded out foreign investors and the private sector, said Hasnain Malik, who heads equity research at Tellimer, an emerging-markets investment analysis firm. The government’s plans to sell off minority stakes in some state-owned enterprises “does not necessarily fix this problem,” he said.
Egypt’s elite can withstand rising costs, living comfortably in Nile-view apartments and gated communities beyond the hustle of Cairo. Life for middle-class Egyptians is deteriorating, said Maha, a 38-year-old tech company employee and mother of two who asked to only be identified by her first name to speak freely.
“I think we will eventually move down the social ladder and end up below the poverty line,” she said.
The government took out a $500 million loan from the World Bank this summer and $221 million from the African Development Bank to help buy wheat. That covers around six weeks of a bread subsidy program supporting 70 million low-income Egyptians.
China assisted with a $2.8 billion currency swap. Saudi Arabia, the United Arab Emirates and Qatar stepped in with pledges of $22 billion in short-term deposits and investments.
“Having what they define as stability in Egypt is in their strategic interests. They really don’t want to go through a repeat of 2011 and its aftermath,” said David Butter, an associate fellow at international affairs think tank Chatham House. Gulf Arab states are also making strategic investments in Egypt for the short and long-term, he said.
The government announced an “extraordinary” social protection program to roll out this month, targeting 9 million families with extended cash transfers and food coupons. This is on top of other assistance programs, including pop-up stands selling subsidized food staples. Officials point to how they managed the supply crunch brought on by the pandemic and the war in Ukraine, saying there is enough wheat and other basic food items for six months.
For some, leaving has promised more hope. Egyptians rank behind only Afghans as the top nationality of “irregular arrivals” to Europe so far this year, according to the International Organization for Migration’s flow chart. Most arrive by sea.
As pressure mounts on the Egyptian pound, the government could devalue the currency again.
“It’s going to hurt. It’s going to increase inflation,” said Kaldas, the Tahrir Institute economic expert. “Subsidies on bread is only one line-item in a family’s budget. So, for a lot of families, this is still going to be a lot of pain.”
Follow Aya Batrawy on Twitter at www.twitter.com/ayaelb.
Aya Batrawy, The Associated Press
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