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US slowdown puts economy toward possible recession

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Although the economy shrank for the second straight quarter, meeting a rule of thumb for a recession, economists and Federal Reserve Chairman Jerome Powell remain skeptical, largely due to a strong labor market. Still, the odds of a recession, possibly by the end of the year, are increasing as households and businesses succumb to the weight of decades-high inflation and rising interest rates.

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“Based on available data, we believe overall activity is not yet consistent with a contraction generally viewed as a recession,” which is instead set to start early next year, Tim Quinlan and Shannon Seery, economists at Wells Fargo, said in a note. & Co. However, “it is undeniable that the economy is cooling down,” they commented.

Second-quarter gross domestic product (GDP) fell 0.9% annualized after a 1.6% decline in the first three months of the year, according to data from the Commerce Department on Thursday. Inflation-adjusted consumer spending slowed to the slowest pace in two years, residential investment posted the biggest drop since the start of the pandemic and business spending cooled.

The report followed the Fed’s decision on Wednesday to raise its benchmark interest rate by another 75 basis points in a bid to reduce inflation, which is at a 40-year high.

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Powell reiterated the Fed’s determination to reduce inflation, but acknowledged that such an effort may hamper the recovery. While achieving a soft landing remains the goal, “it has become more challenging” in recent months, he said.

Consecutive quarters of GDP declines define a recession in most of the world, but in the United States it is not official until economists at the National Bureau of Economic Research deem it so.

However, the breakdown of GDP data suggests that the economy will be fragile for the rest of the year. Several economists still expect the economy to grow in 2022, but the combination of persistent inflation, aggressive Fed tightening, market volatility and weakened demand are daunting headwinds.

Some of the strength shows signs of fading as more companies lay off staff due to economic uncertainty. And while jobless claims fell, they have generally been rising and are at their highest level since November.

Amplifying the risks is a tense geopolitical outlook as Russia’s war in Ukraine continues and stifles the eurozone economy, throwing supply chains into disarray.

Source: Gestion

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