According to data published on the U.S. Bureau of Economic Analysisthe country’s annualized economic growth in the second quarter was -0.9 per cent, below economists’ expectations of a 0.5 per cent increase. This follows an unexpected 1.6 percent contraction in gross domestic product in the first quarter of the year.
“The decline in real GDP reflects decreases in private inventory investment, residential fixed investment, federal government spending, state and local government spending, and nonresidential fixed investment that were partially offset by increases in exports and personal consumption expenditures (PCE)“, the report states.
The U.S. economy is now technically in a recession, which outside the United States is generally defined as two consecutive quarters of economic contraction. The National Bureau of Economic Research, an academic institution that determines whether the U.S. has entered a recession based on a wide range of factors, is scheduled to assess the data and the state of the economy over the next week. U.S. Treasury Secretary Janet Yellen will also hold a conference today.
The dismal U.S. GDP numbers come after the Federal Reserve raised interest rates by another 75 basis points on Wednesday. After the latest hike, U.S. interest rates are now between 2.25% and 2.5%, and the Fed reportedly intends to raise them to about 3.4% by the end of the year and to 3.8% in 2023. The Fed’s primary mandate is to bring inflation back to its target of 2 percent, which is a far cry from the current inflation rate of 9.1 percent. However, the central bank’s efforts to reduce inflation from its highest level in more than 40 years could come at a cost to consumer spending, employment and ultimately economic growth.
Market participants may interpret the latest U.S. GDP numbers as bullish or bearish, depending on how they feel the data has been priced. While negative growth is certainly not a favorable economic climate for risk assets, it could lead the Fed to adopt looser monetary policy sooner than expected. Because markets are generally forward-looking, they may start pricing this event several months in advance, despite the current dire economic conditions.