US economy set for recession after GDP reading confirms contraction

(Alliance News) - The world's largest economy is on course for a "mild" recession, analysts said Thursday, after data confirmed a contraction in the second quarter.

The US economy contracted by 0.6% annually in the second quarter, following a 1.6% decline in the first quarter. It remains in a technical recession.

Oxford Economics Chief US Economist Kathy Bostjancic said: "While we expect a modest rebound in economic growth in H2, the combination of persistently high inflation, more aggressive Fed monetary policy tightening, negative spill over effects from slower global activity and weaker corporate earnings will push the US economy into a mild recession in the first half 2023.

"We expect the economy to show no growth in 2023 after advancing 1.7% in 2022. Rising financial market turbulence is increasing downside risks to our outlook."

The Department of Commerce noted that a second estimate in late August, the figure had been revised down from the first estimate of a 0.9% contraction.

Explaining the decrease, the Department of Commerce said: "Upward revisions to consumer spending, federal government spending, and nonresidential fixed investment were offset by downward revisions to exports, residential fixed investment, and private inventory investment."

Whilst the headline figure remains the same, imports - a subtraction used to calculate GDP - were revised down in this third estimate.

Real GDP in the second quarter of 2022 was 3.5% higher than the final quarter of 2019 - the final quarter prior to the onset of the Covid-19 pandemic.

Capital Economics Senior US Economist Andrew Hunter said: "The annual revision to the national accounts data were more downbeat than we had expected as they show that the previous big gap between GDP and gross domestic income has been narrowed mainly by the latter being revised down, rather than GDP being revised up.

"But the Fed may be more concerned by the fact that core PCE inflation has been slightly higher than previously thought."

The annual growth rate is now believed to be marginally stronger, Capital Economics said, at 1.8% thanks to small upward revisions in 2021.

Hunter added: "But the big picture is that the revisions leave the economic backdrop looking broadly unchanged, with the unwelcome addition of slight upward revisions to the PCE inflation data - the annual core inflation rate is now estimated to have been 5.0% in the second quarter, rather than 4.8%."

Also on Thursday, unemployment fell unexpectedly in the week ending September 24, according to the US Department of Labor.

Initial jobless claims totalled 193,00 during the week, down 16,000 from the revised figure of 209,000 for the week before.

This figure came in well below FXStreet-cited consensus, with expectations of claims ticking up to 215,000.

Nancy Vanden Houten, lead US economist at Oxford Economics, said: "We don't expect claims to fall much from current levels, but don't look for a spike in claims anytime soon either. Claims are more likely to trend higher in 2023 when we expect a mild recession to push the unemployment rate up by 1ppt to 4.7%.

"For now, however, the supply and demand for labor continue to be out of balance. We expect employers will slow the pace of hiring workers well in advance of any significant layoffs, which we don't anticipate until next year."

By Paul McGowan; [email protected]

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