The economy fell for the second consecutive quarter. The Commerce Department has reported that GDP fell 0.9% from April to June, which is on top of the -1.6% decline from January to March. This situation fits a common definition of recession: two consecutive negative quarters.
Several factors have led to this situation. On the one hand, we are experiencing the highest inflation in four decades. This has caused families to consume their savings to maintain their standard of living. Even this cannot be met, because high prices have forced many families to restrict their consumption. Consumption accounts for two-thirds of GDP accounting.
This Wednesday, the Federal Reserve raised interest rates again by 0.75%, so that they are now between 2.25 and 2.50%. This is the fourth rate hike since March. In fact, the higher cost of financing may have contributed to the contraction in GDP. In fact, the real estate market is cooling. The same is true for business investment, which is contracting. The Fed is expected to adopt a further rate hike in September, whether by another 0.75% or by half a point is uncertain.
The signs of economic slowdown were clear at least a month ago, and they are even clearer now. But this lower activity coincides with a very strong labor market, with a historically very low unemployment rate and rising wages. Non-agricultural inventories and the lower contribution of the foreign sector also contributed to the drop in activity.
What is a recession?
The most common definition of recession is a situation in which there are two consecutive negative quarters. But it is not the only one, and in fact it is not the definition used by the federal government. But it is the most common, and the White House, in anticipation of news of the economy contracting for the second consecutive quarter, threw dirt on that definition.
Although there is no official statement, there is a committee of a private organization that is the trigger for the press to assume the word "recession". This is the Business Cycle Committee comprised of eight economists chosen by the National Bureau for Economic Research. The NBER is a non-profit organization. For the NBER Committee, a recession is "a significant drop in economic activity that is nationwide and lasts for more than a few months."