After several months in which economic analysts around the world predicted a recession in the United States, that warning became a reality. For the second consecutive quarter, the economic growth of that country contracted, and the poor performance leaves not only that economy on the ropes but also threatens the rest of the globe.
Between April and June, the US economy fell 0.9%, after the first quarter had fallen 1.4%, according to data published by the Bureau of Labor Statistics.
Market analyst Gregorio Gandini said that the market expected the economy of that country to grow 1%, but the negative performance, in addition to being surprising, is worrying, since the fall in GDP in two consecutive quarters is known as a technical recession.
However, the government itself is unaware that this phenomenon is taking place and warns that the national economy is sufficiently robust. President Joe Biden issued a statement in which he said that despite the “historic global challenges” the country faces, it is “on the right track” and will come out “of this transition stronger and more secure.”
What is happening?
All this is happening in a context of runaway inflation that they have not been able to stop even by raising interest rates.
In the last year, the cost of living has increased 9.1%, the highest indicator in the last 40 years. And this happens because the whole world has been dragging with several problems: the first is the disorders in the supply chain, a situation known as “the container crisis”, which now makes it very expensive to move products by sea. And the new closures in China due to the pandemic continue to generate these disruptions in the international market.
Second, Russia’s invasion of Ukraine is making most raw materials such as oil, gas, wheat, cobalt, fertilizers for agriculture, among others, more expensive, which are abundant in that region and due to the conditions of the conflict cannot go on the market. This situation causes other products such as coal, energy, food to rise in price, in short, inflation has become a wheel that does not stop turning.
And third, after the economy reopened after the pandemic lockdowns, demand skyrocketed, as families had saved money by not having as much to spend, so they went out to spend the savings, and when it was gone, They began to consume with credit. What caused the demand to begin to decline with the reduction in liquidity. In fact, according to figures from the Bureau of Labor Affairs, personal consumption, which accounts for most of the economy, increased at a rate of just 1%, a slowdown from the previous period.
In addition, there were decreases in private investment, in real estate (residential and non-residential), and in federal, state and local government spending.
All this pointed to the increase in prices and that is worrying insofar as people can access fewer products with the same money. The wheel of inflation continues to be wound.
So, one of the measures that the Federal Reserve, counterpart of the Banco de la República, has to preserve the value of money is to increase interest rates, so that the debt is more expensive and then there is less incentive to borrow, so that there is less money available and at the same time less demand. So far the FED has raised its intervention rate to 2.50%.
That should lower prices somewhat. The problem is that if there is no one to buy the productive apparatus, it loses its main engine and begins to slow down. That is what is currently happening: the United States is diminishing its ability to generate wealth.
The president of the Fed, Jerome Powell, tried to reduce the fear that the return to a more aggressive fiscal policy will end up generating a recession in the largest economy in the world: “I do not think it is likely that the US economy is in a recession right now Powell said.
At the moment, President Biden explained in his communication that “coming off the historic economic growth of last year (5.7%) and recovering all the private sector jobs lost during the pandemic crisis, it is not surprising that the economy is slowing down as that the Federal Reserve acts to reduce inflation”, and highlighted the solid labor market, with an unemployment rate of 3.6%.
How long could it last?
Gandini explained that the technical recession is different from the economic recession, the latter occurs when, in addition to bad economic growth data, there are deteriorations in other indicators such as unemployment, and in this case that has not been observed, it remains to be seen what happens with employment after the contractions continue and the progressive and more aggressive increase in interest rates.
“Unemployment of 3.6% is quite good, it is the same as before the pandemic and then there was talk of full employment,” said the analyst. So much so, that employers find it difficult to fill vacancies.
Powell knows well that the economy needs to slow down and even contract, for demand to dwindle and supply to somehow catch up.
Last Tuesday, the International Monetary Fund (IMF) published its forecasts and calculated that the US economy will grow 2.3% this year and 1% next year, estimates that reduce by 1.4 and 1.3 points, respectively , those of April.
The institution assured that, although it does not foresee that the US economy will enter a recession this year and in 2023, a “small shock could be enough” to take it to that scenario.
However, it is possible that this new data will move the projection board again. For now, the focus will continue to be on the behavior of employment.
0,9%
The US economy contracted in the second quarter of 2022.
3,6%
is the unemployment rate for the United States, practically at full employment.
