AFP

Wall Street stocks rose on Thursday despite data showing the US economy contracted for a second straight quarter, as investors took it as a signal the Federal Reserve may slow interest rate hikes.

Stocks initially fell after the economic report, which showed US gross domestic product declined at an annual rate of 0.9 percent in the second quarter, following an even bigger drop in the first three months of the year.

But markets pivoted later in the morning, betting that clear signs of economic weakness would prompt the Fed to ease off on steep increases in borrowing costs. The US central bank on Wednesday undertook its second straight 75 basis point increase, and signaled it is prepared to do more.

“The real catalyst … is a belief that bad news (earnings disappointments and weak data) is good news (fewer rate hikes from the Fed),” Briefing.com said in an analysis.

Major US indices finished the session up around one percent, following even bigger gains Wednesday after investors welcomed comments by US Federal Reserve chief Jerome Powell, who said the central bank at some point would be able to slow the pace of rate hikes.

“Well, GDP was quite poor, so there won’t be a hat-trick of 75 basis point hikes in September, that’s for sure,” said Fawad Razaqzada at City Index and FOREX.com.

“The US GDP data has re-affirmed my view that the Fed will have to slow down the pace of the hikes and potentially go in reverse in early 2023,” he added.

Analysts also pointed to improved investor sentiment that has enabled stocks to advance despite lackluster earnings because the results have not been as bad as feared.

Also, many investors believe that “any downturn that we are going through will likely be mild,” said Jack Ablin, chief investment officer of Cresset Asset Management.

But Ablin said it was still too soon to “declare victory” on inflation.

Earlier, European stock markets finished mostly higher.

Europe’s energy sector was in particular focus with Britain’s Shell and France’s TotalEnergies posting bumper second-quarter profits on elevated oil and gas prices. 

Asian indices mostly climbed following Wednesday’s surge on Wall Street.

– Key figures at around 2030 GMT –

New York – Dow: UP 1.0 percent at 32,529.63 (close)

New York – S&P 500: UP 1.2 percent at 4,072.43 (close)

New York – Nasdaq: UP 1.1 percent at 12,162.59 (close)

London – FTSE 100: DOWN less than 0.1 percent at 7,345.25 (close) 

Frankfurt – DAX: UP 0.9 percent at 13,282.11 (close)

Paris – CAC 40: UP 1.3 percent at 6,339.21 (close)

EURO STOXX 50: UP 1.2 percent at 3,652.20 (close)

Tokyo – Nikkei 225: UP 0.4 percent at 27,815.48 (close)

Hong Kong – Hang Seng Index: DOWN 0.2 percent at 20,622.68 (close)

Shanghai – Composite: UP 0.2 percent at 3,282.58 (close)

Euro/dollar: DOWN at $1.0197 from $1.0200 Wednesday

Pound/dollar: UP at $1.2177 from $1.2158 

Euro/pound: DOWN at 83.70 pence from 83.89 pence

Dollar/yen: DOWN at 134.25 yen from 136.57 yen

Brent North Sea crude: UP 0.5 percent at $107.14 per barrel

West Texas Intermediate: DOWN 0.8 percent at $96.42 per barrel

burs-jmb/hs

The US economy contracted for a second straight quarter between April and June, according to official data released Thursday, adding fuel to recession fears and creating a headache for President Joe Biden ahead of midterm elections.

Gross domestic product declined at an annual rate of 0.9 percent in the second quarter, following a bigger drop in the first three months of the year, according to the Commerce Department.

While not the official definition, two quarters of negative growth is commonly viewed as a strong signal that a recession is underway, and a downturn in the world’s largest economy would have global consequences — as well as domestic political costs.

Biden insisted that the US economy is “on the right path” despite the slowdown, touting the strong labor market.

“That doesn’t sound like a recession to me,” he said in remarks at the White House, noting unemployment at near record lows and more than a million jobs created in the latest quarter.

But his critics are sure to seize on the report as proof of the veteran Democrat’s mismanagement.

After a 1.6 percent decline in the first three months of the year, the report said the slowdown in the latest quarter was largely due to drops in government spending at all levels, in private investment on goods including autos, and on residential buildings, despite an increase in exports.

But personal consumption expenditures (PCE) continued to increase, though at a slower rate than the prior quarter, the data showed.

Still, American families continue to feel the bite from sky-high inflation, as a result of supply chain snarls due to Covid-19 lockdowns, as well as the fallout from Russia’s war in Ukraine, which has sent food and fuel prices soaring.

Consumer prices topped nine percent in June, the highest in more than four decades, and the GDP data showed another key inflation measure, the PCE price index, rose a still-high 7.1 percent in the latest three months, the same as in the January-March period.

But gas prices at the pump have fallen 74 cents since hitting a record of more than $5 a gallon in mid-June.

The US central bank has been raising interest rates aggressively — with the latest big hike on Wednesday — to try to cool the economy and tamp down price pressures.

“It’s no surprise that the economy is slowing down as the Federal Reserve acts to bring down inflation,” Biden said in a statement shortly after the GDP report was released. 

“But even as we face historic global challenges, we are on the right path and we will come through this transition stronger and more secure,” he said.

– Recession debate –

It would be highly unusual for an economy still adding jobs at a rapid pace, and with near record-low unemployment, to fall into recession. Even so, many economists say the discussion of a downturn is more a matter of when, not if.

That poses a major political headache for the president, who has seen his approval ratings plummet in recent months.

“The government just announced what every American has been feeling for nearly a year — we are in a recession,” House Republican leader Kevin McCarthy said on Twitter. “Democrats would rather redefine a recession than restore a healthy economy.”

But Fed Chair Jerome Powell agreed with Biden and other economists who say the GDP figures are inconsistent with other strong data.

Powell on Wednesday said he does not think the country is currently in a recession because “there are too many areas of the economy that are performing too well.”

Treasury Secretary Janet Yellen said Thursday there was a path to lower inflation without triggering an uptick in joblessness, though she acknowledged “numerous risks” to the economic outlook.

Mike Fratantoni, chief economist of the Mortgage Bankers Association, was among those who echoed Powell’s view, saying: “The ongoing strength in the job market and other signs of growth make it unlikely that this will be categorized as a recession.”

Powell also said it is possible to cool price pressures without causing a downturn or a big jump in joblessness, although he acknowledged the path to threading that needle is narrowing.

But economist Mohamed El-Erian said on Twitter that the data point to “deepening stagflation and flashing red recession risk.”

That impression may be the one that sticks in the minds of investors and consumers. 

Wall Street was initially not happy with the data, but stocks rebounded and ended the day with solid gains of more than one percent.

The US House of Representatives passed a bill on Thursday to boost domestic production of semiconductors, the in-demand microchips that power everything from smartphones to cars and weapons.

The CHIPS Act was approved by the House in a 243-187 vote with 24 Republicans joining Democrats and now goes to President Joe Biden for his signature.

Biden had lobbied strongly for passage of the bill, which will increase US competitiveness with major chip-maker China. He welcomed its approval, saying it will “lower the costs of every day goods.”

“And, it will create high-paying manufacturing jobs across the country and strengthen US leadership in the industries of the future at the same time,” the president said in a statement.

“By making more semiconductors in the United States, this bill will increase domestic manufacturing and lower costs for families,” he said. “And, it will strengthen our national security by making us less dependent on foreign sources of semiconductors.”

The legislation provides $52 billion to increase domestic semiconductor production and more than $100 billion over five years for research and development.

The CHIPS Act was passed on Wednesday in the Senate by a rare bipartisan vote of 64 to 33, with 17 Republicans joining hands with Democrats.

Global semiconductor supplies were disrupted by fallout from Covid-19 shutdowns, sparking widespread shortages of the chips — many of which are made in Asia.

Worldwide chip shortages notably slowed production of new automobiles last year, causing prices to increase.

Passage of the CHIPS Act by the House came shortly after a lengthy telephone call between Biden and Chinese President Xi Jinping.

China criticized details of the bill earlier Thursday.

Foreign ministry spokesman Zhao Lijian said that while the act “claims to be aimed at improving the competitiveness of US technology and chips, (it) contains provisions that restrict normal scientific and technological cooperation between China and the United States.

“China is firmly opposed to this,” Zhao told reporters.

Senate passage of the bill came a day after the South Korean group SK announced a huge investment in US semiconductors and other cutting-edge industries.

The conglomerate said in a statement it plans to “increase its new investment in the United States by $22 billion in areas including semiconductors, green energy, and bioscience, creating tens of thousands of new high-tech, high-paying American jobs.”

Now that the US economy has posted two consecutive quarters of negative growth, is it in recession? Opinions are starkly divided, and President Joe Biden is definitely in the No camp.

The “R” word is akin to profanity in some Washington circles these days, especially within the Biden administration.

Just defining exactly what a recession is and when it begins has sparked furious debate — based as much around politics as economics.

“That doesn’t sound like a recession to me,” the US president said Thursday after the Commerce Department reported that GDP declined at an annual rate of 0.9 percent in the second quarter, following a bigger drop in the first three months of 2022.

While not the official definition, two quarters of negative growth is commonly viewed as a strong sign that a recession is underway — but the veteran Democrat’s government has been at pains for a week to explain why the term does not apply.

“How Do Economists Determine Whether the Economy is in a Recession?” the White House said in a blog post last week, apparently trying to get the jump on Thursday’s data release.

“While some maintain that two consecutive quarters of falling real GDP constitute a recession, that is neither the official definition nor the way economists evaluate the state of the business cycle,” the White House said.

Of course, opposition Republicans quickly picked up on the spin.

“Newsflash for Joe Biden: You can’t change reality by arguing over definitions,” the Republican National Committee said in a statement on Monday.

Then on Thursday, top House Republican Kevin McCarthy tweeted: “Democrats would rather redefine a recession than restore a healthy economy.”

– ‘One official arbiter’ –

So beyond the political spin machine, what really is a recession?

In a note on its website, the International Monetary Fund insists there is “no official definition of recession.”

“Most commentators and analysts use, as a practical definition of recession, two consecutive quarters of decline in a country’s real (inflation-adjusted) gross domestic product (GDP),” the Washington-based global lender says.

For the IMF’s chief economist Pierre-Olivier Gourinchas, “the general assessment as to whether the economy is in a recession overall is a little bit more complex.”

Federal Reserve Chair Jerome Powell said Wednesday the Fed “doesn’t make a judgment on that,” but added: “What a recession really is — it’s a broad-based decline across many industries that is sustained for more than a couple months.”

And then on Thursday, Treasury Secretary and former Fed chair Janet Yellen chimed in: “I think we should avoid a semantic battle.”

David Wilcox, a senior economist at the Peterson Institute for International Economics and at Bloomberg Economics, says that considering an economy as entering recession after two consecutive quarters of negative GDP growth is simply “wrong.”

“I kind of cringe and resist every time I see” that definition, Wilcox told AFP.

“There’s one official arbiter of recession dating in the United States. And that’s the National Bureau of Economic Research.”

– Late to the party? –

The NBER, a private, independent and nonpartisan entity, was founded in 1920 to refine research on the US economy. Its “Business Cycle Dating Committee” uses several data points to determine when the economy is in expansion or recession.

“A recession is the period between a peak of economic activity and its subsequent trough, or lowest point,” the NBER says on its website.

“The NBER’s definition emphasizes that a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

But because the bureau prefers to base its assessment on solid data and publish its opinion several months after the figures are released, it can seem a little late to the party.

Ellen Hughes-Cromwick, an economist at the Third Way, a center-left think tank, says that the NBER’s traditional delay is “not a problem” but rather a “methodology” that allows the bureau to avoid repeated revisions.

“What is common knowledge among economists is that in that preliminary estimate (each quarter), they have less than 50 percent of actual statistics,” she explains.

“In other words, 50 percent of that GDP preliminary estimate… are estimates,” adds Hughes-Cromwick, who worked as an economist under presidents Ronald Reagan and Barack Obama.

Translation: the NBER is perhaps totally justified in taking its time.

The US economy contracted for a second straight quarter between April and June, government data showed Thursday, adding fuel to recession fears in a headache for President Joe Biden ahead of midterm elections.

Gross domestic product declined at an annual rate of 0.9 percent in the second quarter, following a bigger drop in the first three months of the year, according to the Commerce Department.

While not the official definition, two quarters of negative growth is commonly viewed as a strong signal that a recession is underway, and a downturn in the world’s largest economy would have global consequences — as well as domestic political costs.

Biden insisted that the US economy is “on the right path” despite the slowdown, touting the strong labor market.

“That doesn’t sound like a recession to me,” he said in remarks at the White House.

But his critics are sure to seize on the report as proof of the veteran Democrat’s mismanagement.

After a 1.6 percent decline in the first three months of the year, the report said the slowdown in the latest quarter was largely due to drops in government spending at all levels, in private investment on goods including autos, and on residential buildings, despite an increase in exports.

But personal consumption expenditures (PCE) continued to increase, though at a slower rate than the prior quarter, the data showed.

The US economy also continues to battle sky-high inflation, as a result of supply chain snarls due to Covid-19 lockdowns, as well as the fallout from Russia’s war in Ukraine which has sent food and fuel prices soaring.

Consumer prices topped nine percent in June, the highest in more than four decades, while the GDP data showed another key inflation measure, the PCE price index, rose a still-high 7.1 percent in the latest three months, the same as in the January-March period.

The US central bank has been raising interest rates aggressively — with the latest big hike on Wednesday — to try to cool the economy and tamp down price pressures.

“It’s no surprise that the economy is slowing down as the Federal Reserve acts to bring down inflation,” Biden said in a statement shortly after the GDP report was released. 

“But even as we face historic global challenges, we are on the right path and we will come through this transition stronger and more secure,” he said.

– Recession debate –

It would be highly unusual for an economy still adding jobs at a rapid pace, and with near record-low unemployment, to fall into recession. Even so, many economists say the discussion of a downturn is more a matter of when, not if.

That poses a major political headache for the president, who has seen his approval ratings plummet in recent months as American families struggle to make ends meet due to surging inflation.

Fed Chair Jerome Powell agreed with Biden and other economists who say the GDP figures are inconsistent with other strong data.

Powell on Wednesday said he does not think the country is currently in a recession because “there are too many areas of the economy that are performing too well.”

Treasury Secretary Janet Yellen said Thursday there was a path to lower inflation without triggering an uptick in joblessness, though she acknowledged “numerous risks” to the economic outlook.

Mike Fratantoni, chief economist of the Mortgage Bankers Association, was among those who echoed Powell’s view, saying “the ongoing strength in the job market and other signs of growth make it unlikely that this will be categorized as a recession.”

Powell also said it is possible to cool price pressures without causing a downturn or a big jump in joblessness, although he acknowledged the path to thread that needle is narrowing.

But economist Mohamed El-Erian said on Twitter that the data point to “deepening stagflation and flashing red recession risk.”

That impression may be the one that sticks in the minds of investors and consumers.

Wall Street was initially not happy with the data, but stocks rebounded and were solidly higher at mid-afternoon.