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The United States Enters Recession

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The United States may soon enter recession, following the release by the Bureau of Economic Analysis of second quarter 2022 growth data pointing to a negative 0.9% decline.

The first quarter of this year’s U.S. economy contracted 1.6 %, marking the first drop in the nation’s economic growth since the pandemic.

The negative U.S. growth data for the second quarter is because of a drop in home buying due to soaring mortgages. Further, consumers have reined in their spending in the face of rampant inflation, while businesses have lowered their inventory levels.

Some economists, such as former White House economic advisor and former Harvard Chancellor Larry Summers, anticipated that the U.S. was on the verge of a recession. Still, others, such as Nobel Prize winner Paul Krugman, dismissed that risk.

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The news comes as a bucket of cold water for the Biden administration, which faces a low popularity rating, and his party is at a clear disadvantage against the Republicans for the midterm elections.

Since Tuesday, the White House has been in a state of denial and even issued a missive asking Americans to take a holistic view of the economy and not to assume that two consecutive periods of negative growth means a recession. This, however, is the most widely accepted definition among experts in economics and other areas.

The entry into a recession of the U.S. economy comes at a time when the country is still plagued by an inflation rate of 9.1% per year and a context of supply crisis, where supplies of commodities such as gas and oil have been globally limited by the war in Ukraine and the policies of President Biden, also the Zero Covid-19 policy in China has hindered the supply of manufactured goods.

On the other hand, the U.S. finds itself without the spending capacity to fiscally or monetarily exit the recession. While the Fed is decreasing the number of dollars circulating in the market, with aggressive interest rate hikes; the Federal Government has severely depleted its pocketbook after the disbursement of three massive stimulus plans to exit the Covid-19 crisis that have left the coffers of the most prosperous nation on the planet empty.

The official arbiter of whether the U.S. is in a recession is the National Bureau of Economic Research (NBER), which can take months even after the release of growth data before determining whether the country is in the midst of a recession.

The U.S. enters murky waters

Despite unemployment standing at 3.6%, there are signs that show how economic activity is lagging, such as a decline in household consumption, a slowdown in housing demand, or an increase in claims for unemployment benefits for the first time since 2021.

Even if the NBER determines that the current period is not a recession, the U.S. has entered murky waters where at least until 2023 little growth will be seen and moderately high inflation, as Fed Chairmain Jerome Powell acknowledged in his speech to the press after the Federal Open Market Committee (FOMC) determined to raise interest rates another 0.75 points—emulating the June hike that constituted the largest rate hike since 1994.

As a result of a rise in interest rates, credit in the economy becomes more expensive, making it more costly for Americans to shop with their credit cards, or even to access a home, student, or auto loan. With less money flowing through the credit systems, demand is discouraged, which means fewer sales for businesses, which translates into layoffs for thousands of Americans. The severity of the recession is yet to come.

The Fed has signaled that it will remain firm in containing inflation, despite the consequences of continued interest rate hikes. According to the investment fund, BlackRock, in its mid-year outlook report, it believes that the central bank has lost the ability to stimulate economic growth and control inflation, meaning that the authorities will have to choose between reducing unemployment or prices, but not both at the same time. Volatile times are ahead in the United States.

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