With economy shrinking for a second quarter, talk of stagflation resurfaces
In the midst of a debate between the White House and its political adversaries on whether the US economy is in a recession comes this development: a second-straight quarter of GDP contraction, amid rising inflation.
By some definitions, that combination is called stagflation, although unemployment in the United States is low. The jobs picture remains a bright spot amid the dour economic news of the past week, headlined by the economy’s reported 0.9 percent contraction in the year’s second quarter.
According to the Investopedia website, stagflation is “characterized by slow economic growth and relatively high unemployment …which is at the same time accompanied by rising prices (ie, inflation)”. Stagflation can be alternatively defined as a period of inflation combined with a decline in the gross domestic product.
Stagflation was first recognized during the 1970s, when many developed economies sustained rapid inflation and high unemployment due to a global oil shock, according to Investopedia.
On Thursday, a day after the Federal Reserve raised interest rates by 0.75 percentage point to a range of 2.25-2.5 percent in an effort to ease pricing pressures, the Commerce Department reported the GDP contraction for the April to June quarter, after a 1.6 percent retraction in the first quarter.
“Call it a recession or stagflation or a slowdown or a transitory blip or even Ethel or Fred－however you name it, the US economy described in Thursday’s GDP report for the second quarter is struggling,” The Wall Street Journal Editorial Board wrote on Thursday.
“That’s distressing for the American families and businesses living through it, and a political liability for the Democrats presiding over it. No wonder they want to pretend it’s not happening.”
‘Back to the 1970s’
The newspaper added: “President (Joe) Biden inherited a growing economy primed to roar back from the pandemic, and in barely a year and a half has dragged America back to the 1970s. The best word for what we have now is stagflation, the ugly combination of slow growth and rapidly rising prices.”
Treasury Secretary Janet Yellen, who previously was chair of the Federal Reserve, offered a different take on Thursday.
“Most economists and most Americans have a similar definition of recession－substantial job losses and mass layoffs, businesses shutting down, private-sector activity slowing considerably, family budgets under immense strain,” she said at a news conference.
“In sum, a broad-based weakening of our economy. That is not what we’re seeing right now when you look at the economy. Job creation is continuing; household finances remain strong. Consumers are spending, and businesses are growing.”
Consumer spending, accounting for roughly two-thirds of the US economy, slowed to a 1 percent annualized growth rate in the second quarter, from a 1.8 percent pace in the first, the GDP report showed.
The slowing growth was driven by a 4.4 percent drop in spending on goods, which had soared during the pandemic, and a closer look suggests that much of that was due to elevated inflation rather than higher borrowing costs.
Consumers spent nearly $6 billion more on food for consumption at home than in the first quarter but walked out of supermarkets with less of it.
Services spending rose 4.1 percent, as people relieved of pandemic restrictions spent money on travel and restaurants.
It’s not clear how long that will last though, said Rubeela Farooqi of High Frequency Economics.
The report reflected a slowing of inventory accumulation and a boost to growth from trade, both of which analysts said at least partially reflected pandemic-disrupted supply chains.
However, former US Treasury secretary Lawrence Summers said on Twitter: “Growth is only negative because of inventory decumulation, which in part reflects strength.” But he added that spending growth “will have to slow way down if inflation is to approach target levels”.
Inflation as measured by the core personal consumption expenditures price index, compiled by the Commerce Department’s Bureau of Economic Analysis－which the Fed follows closely because it excludes more volatile components like food and energy－fell to 4.4 percent in the second quarter from 5.2 percent in the first. That is still much higher than the Fed’s 2 percent goal for inflation.
The consumer price index produced by the Labor Department’s Bureau of Labor Statistics was up 9.1 percent in June year over year.
Agencies contributed to this story.