Top economic takeaways as US wrangles with recession fears

Back-to-back GDP slowdown, Fed doubling down, a cooling jobs market, red-hot prices, tech’s big bang and other economic highlights from a busy week.

A pedestrian carries shopping bags in San Francisco, California, US
American consumers, feeling less confidence about their spending as inflation takes a bigger bite out of their earnings, did spend more on goods in June but mostly because prices continue to soar [File: Bloomberg]

It was an eventful, data-packed week for the US economy.

The Federal Reserve, the country’s central bank, raised interest rates by 75 basis points on Wednesday, the second time in as many meetings, in the hopes that higher borrowing costs help balance supply and demand. On Thursday, gross domestic product (GDP) estimates indicated that the US economy contracted for two consecutive quarters, stirring concerns that the country may be headed towards a recession.

On Wall Street, some of the biggest names in American industry including Apple, Amazon, Microsoft and Google-parent Alphabet released better-than-expected earnings and forecasts, sending stocks higher. Other data showed that the US labour market is still very tight despite companies announcing layoffs.

After printing trillions of dollars during the pandemic’s peak to stimulate the economy and soften the shock on companies and households, US annual inflation is now at a 40-year high and there are indicators Americans are feeling the pain. Consumer spending, which accounts for more than two-thirds of all economic activity, may be in decline and retailers are bracing for the pullback.

Here are the main economic developments from a busy week:

  • Walmart’s warning 

Walmart lowered its profit outlook for the second quarter and the full year on Monday, underscoring that rising prices for food and gas are causing consumers to spend less on goods like apparel that have greater profit margins. By Tuesday morning, Walmart’s shares had dropped nearly 9 percent, also dragging down major chains like Target and Kohl’s. The world’s largest retailer seldom lowers its profit forecast in the middle of a quarter, so retail observers questioned whether the warning from the industry bellwether was a sign of things to come for the entire retail industry.

  • Waning consumer confidence

According to US statistics released on Tuesday, consumers are less secure about spending. The Consumer Confidence Index decreased for a third month to 95.7 from downwardly revised 98.4 in June. That’s the lowest reading since February 2021.

  • The Fed doubles down, says more increases depend on future data 

The Federal Reserve raised interest rates by 75 basis points on Wednesday. The US central bank has increased its efforts to combat the greatest inflation in more than 40 years and stated that more “unusually large increase could be appropriate” at its September meeting. That decision will “depend on the data we acquire between now and then”, Fed Chairman Jerome Powell told reporters, as he stressed that the central bank’s overarching focus is to bring inflation back down to “our 2 percent goal”. Since March, the Fed has increased rates by 225 basis points.

  • Higher mortgages mean fewer home sales

The pandemic-era housing boom is cooling fast as rising mortgage rates make it more expensive to buy and keep up with mortgage payments. According to figures released on Wednesday, US pending home sales fell in June by the most since April 2020. “Early signs of a cooling effect are most evident in the housing market, a sector that’s been severely impacted by rising mortgage costs,” Peter Essele, head of portfolio management at Commonwealth Financial Network, a Massachusetts-based firm, told Al Jazeera.

  • Microsoft, Alphabet, Apple and Amazon lift sentiment on Wall Street 

Also on Wednesday, rosy outlooks from Microsoft and Google’s parent Alphabet sparked a rally in high-growth stocks. Microsoft shares jumped after it forecast revenue would grow by double digits this fiscal year. Google’s parent company Alphabet rose on better-than-expected sales. By Friday, Apple and Amazon joined the big tech rally, adding about $175bn to their combined market value after upbeat results boosted investor confidence. Amazon’s shares jumped about 11 percent. Apple increased by more than 3 percent as the tech giant said that despite customers’ tightened spending habits, demand for iPhones remained high.

  • The US economy shrinks for second straight quarter but don’t call it a recession

According to the preliminary estimate released by the US Department of Commerce on Thursday, GDP decreased at an annualised pace of 0.9 percent after declining by 1.6 percent in the first three months of the year. Informally, a two-quarter stretch of declining growth indicated that the economy is in a downturn. Despite the figures, US President Joe Biden and administration officials continued to say that a recession is not imminent.

  • Hiring is slowing but unemployment rate still remains at a 50-year low

The Department of Labor on Thursday showed that, even though fewer Americans asked for unemployment benefits for the first time in four weeks, the total was still the largest since November, raising the possibility that the economy may be slowing down. At 3.6 percent, the jobless rate is the lowest it has been in nearly 50 years. The Employment Cost Index released on Friday revealed that a tight labour market helped to enhance pay growth, which resulted in a significant increase in US labour expenses in the second quarter. Labour costs surged 5.1 percent on a year-on-year basis, the largest rise since the current series started in 2001. Several businesses recently stated their intention to reduce their workforce. E-commerce firm Shopify said this week that it will be letting go of 10 percent of its workers. Apple, Alphabet and Microsoft have also stated that recruiting is being slowed.

  • Despite raises, higher prices are taking a bite out of Americans’ paycheques 

Consumer prices jumped 6.8 percent in June compared with a year earlier – the highest annual increase since 1982, the Department of Commerce said on Friday. The personal consumption expenditures (PCE) price index, which the Fed monitors to determine whether it is hitting its objective of 2 percent inflation, rose 1 percent from one month earlier. On Friday, data also revealed that consumer spending increased by 1.1 percent in June driven higher by the rising cost of living. Americans spent more on both healthcare and cars. With prices soaring, inflation-adjusted implies that consumer expenditure only slightly recovered in June — by 0.1 percent.

Source: Al Jazeera