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US slips into technical recession

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To: 07/28/2022 17:07

The wave of interest rate hikes in the fight against high inflation is slowing the US economy. In the spring, the US economy contracted again and entered a recession.

What some renowned economists and bankers have recently prophesied has now happened: the US economy is in a technical recession. Economic output fell for the second consecutive quarter. During the period from April to the end of June, gross domestic product (GDP) fell by 0.9% at an annualized rate. The economy had already fallen 1.6% in the first quarter.

Companies invest less

The US Department of Commerce justified the further decline in GDP by falling inventories and business investment. Added to this is the drop in construction spending and the drop in public spending. Although exports and consumer spending by private households increased, they could not offset declines in other areas.

The US Federal Reserve likely contributed to the slowdown with its restrictive monetary policy. To combat high inflation, it has raised the policy rate by 2.25 percentage points since March. There has never been such a rapid wave of interest rate hikes in such a short time.

Fed chief has so far ignored recession risk

Yesterday, Fed Chairman Jerome Powell played down the risk of a recession. After another sharp rate hike of 0.75 percentage points, he said he didn’t think the economy was in a recession. As justification, he referred to the strength of the labor market. We are close to full employment. During the first half of the year, an average of 456,700 new jobs were created per month.

Even US President Joe Biden did not see the US economy shrinking earlier this week. “In my opinion, we are not heading into a recession,” he said on Monday, referring to the good labor market figures. The latest data, which now shows a recession in the first half of the year, is a major setback for Biden ahead of November’s midterm congressional elections. His political opponents cite the development as evidence of his supposedly flawed economic policies.

“High inflation rates, rising key interest rates and much worse financing conditions are a burden,” said economist Bastian Hepperle of Hauck Aufhäuser Lampe Privatbank. This spoils the consumer mood and companies reduce their investment and hiring plans. “The outlook is anything but rosy.”

Economists: “Not a real recession”

Other economists were less pessimistic. Commerzbank expert Bernd Weidensteiner spoke of a technical recession, but not a general recession. He referred to the National Bureau of Economic Research (NBER), which in addition to GDP development also considers other economic variables such as the labor market and currently sees no real recession. “The US economy is in a technical recession, without the economy actually being in an economic contraction phase according to official announcements,” agrees Thomas Gitzel, chief economist at VP Bank, essentially staying the course on interest rate hikes. ‘interest.

Fed Chairman Powell yesterday announced another sharp rate hike of 0.75 percentage points in September. He reiterated that an interest rate level of 3-3.5% at the end of the year was a desirable level of monetary policy. It was only after that, i.e. from 2023, that the Fed signaled a slower pace.

US growth figures are extrapolated for the year, ie annualized. They are therefore not directly comparable to growth data for Europe, where this is not the case. To obtain an approximation of a growth rate comparable to that of Europe, it would be necessary to divide by four the American rate.

Source www.tagesschau.de

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