Los Angeles Times

GDP’s pullback may not be so bad

The economy shrank again, raising fears of a recession — and hope for taming inflation.

- By Don Lee

WASHINGTON — The government’s announceme­nt Thursday that the U.S. economy had two straight quarters of no growth set off new fears about an impending recession, but for most Americans, there was underlying good news mingled with the bad.

That’s because the slowing economy signals that the Federal Reserve’s campaign to curb inflation by raising interest rates, coupled with other developmen­ts here and abroad, may be starting to work.

And although recessions usually bring higher unemployme­nt, a far greater number of workers and families suffer from inflation.

Also there’s good reason to think that any recessionr­elated layoffs won’t be as bad this time around, especially if the downturn is relatively mild and short-lived, as most economists predict.

Moreover, many Americans will enter any recession with higher-than-usual savings, and the labor market remains strong, despite a smattering of layoffs across the country. Thursday’s economic report showed rising incomes and a still-solid savings rate of 5.2% in the second quarter.

The official designatio­n of a recession is made by a special panel of experts, who consider several other factors besides quarterly growth, including employment, income, spending and industrial production. Their decision will not come for some months, perhaps longer if the data are clouded.

But Republican­s lost no time in renewing their accusation­s that President Biden and other Democrats have mismanaged the economy, pointing to one popular definition of recession as being two consecutiv­e quarters without any growth in gross domestic product.

“Since President Biden took office and the Democrats took control of Congress, we’ve been in an all-out economic tailspin,” said Sen. Steve Daines (RMont.).

Such criticisms, and the White House’s staunch denials that the economy is in a meltdown, are certain to continue in the months leading to a midterm election that will determine which party controls Congress.

Beneath the political rhetoric, there’s some truth in both sides’ claims. Most economists are predicting a moderate recession at some point.

Although recessions are rarely viewed as positive, they are a regular feature of the U.S. economy, with one on average every 6½ years since 1945.

What complicate­s things this time is the fact that inflation has erupted at the fastest pace in decades.

A moderate recession that raises unemployme­nt by a percentage point or two from the current 3.6% is likely to cost on the high end around 3 million jobs.

But the U.S. workforce numbers around 160 million people, so only a small fraction will be in danger of unemployme­nt.

Inflation and surging prices, on the other hand, hurt all but the richest members of society.

Federal Reserve Chair Jerome H. Powell said as much Wednesday when he announced another big interest rate hike and signaled more to come as the central bank tries to beat back inflation that climbed to a fourdecade high of 9.1% in June.

Even if the Fed’s tightening of financial conditions sends the economy into recession, causing unemployme­nt to rise and creating other financial hardships for some, Powell said choking off inflation would be a plus for everyone as it’s a crucial preconditi­on for stable and sustainabl­e growth.

“Price stability is really the bedrock of the economy,” he said. “Nothing in the economy works — the economy doesn’t work for anybody without price stability.”

Powell said he didn’t think the economy was currently in a recession, especially because of the robust labor market.

“You know, 2.7 million people [were] hired in the first half of the year. It doesn’t make sense that the economy would be in recession with this kind of thing happening,” he said.

And with still nearly two job openings for every unemployed person, Powell suggested that job losses may not be large compared with prior recessiona­ry periods. “This time could be different,” he said.

At the moment, based on the report Thursday from the Commerce Department, the economy seems to be gliding along the edge. Consumer spending, which accounts for more than twothirds of U.S. economic activity, slowed but still increased modestly over the second quarter. People spent less for home furnishing­s and clothes, but more at hotels, restaurant­s and other services.

Were it not for the fact that companies stockpiled fewer goods, which in part was due to persistent supply constraint­s, the economy would have posted a small positive number for the spring quarter.

Still, the effects of the Fed’s rate hikes and high inflation are clearly taking their toll. The data reflected “a noticeable decelerati­on of economic activity in the real economy due to a weakening of domestic demand and the combined impact of an energy shock, inflation and rising rates,” said Joseph Brusuelas, chief economist at the accounting firm RSM.

Thursday’s report showed that the nation’s GDP, the broadest measure of economic activity, declined at an annualized rate of 0.9% in the second quarter, dragged down by smaller inventory buildup but also a falloff in housing and other business investment and government spending.

That came after a bigger 1.6% drop in the first three months of the year.

Last year GDP expanded at an exceptiona­lly rapid pace of 5.7%, the fastest since 1984, as the economy bounced back from the brief plunge caused by the pandemic.

Most economists agree there isn’t yet the significan­t broad-based drop-off in economic activity that would mark an official recession.

The Biden administra­tion has pushed back against Republican attacks on its handling of the economy, but the party in power, and the president in particular, traditiona­lly carries the political burden of responsibi­lity.

Beyond the political chest-beating and the academic debate among economists, the reality is that the American economy is still grappling with COVID-19 pandemic-induced shocks.

And if the forecaster­s are right and a recession is mild — and inflation is tamed — over the long haul, that should bring more good than bad for most people.

‘It doesn’t make sense that the economy would be in recession with this kind of thing happening.’

— JEROME H. POWELL, Federal Reserve chairman, referring to robust hiring in the first half of 2022

 ?? Seth Wenig Associated Press ??
Seth Wenig Associated Press

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