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GDP of United States shrinks by 0.9% – Commerce Dept

Amidst increasing fears of recession-like economic events in the United States of America, preliminary estimate report published by Commerce Department on Thursday show a decrease of 0.9% in the Gross Domestic Product of the United States at an annualized rate.

This fall in GDP would surely be a political headache for the President of the United States, Joe Biden, whose Democratic Party would have to face several elections on the basis of the US economy.

This 0.9% fall in GDP comes after a 1.6% decline in the major economic yardstick during the first three months of the current year. 40-year high inflation rates, coupled with step by step increase of interest rates by the US Federal Reserve, affected the amount of money spent by consumers.

The report by the commerce department also revealed that there was an increase in personal consumption by nearly 1%. Personal consumption is one of the major factors which make up the economy.

Sal Guatieri, who is a senior economist at BMO Capital Markets, said that the economy lost its steam quickly in the face of a 40-year-high inflation scenario. The increasing cost of borrowing capital and continuous tightening of financial conditions by the US Federal Reserve resulted in a decrease in GDP. He also added in his note that the economy is in a highly vulnerable position to slip into a recession.

The report released on Thursday would make things more complicated for Federal Reserve, as it would have to take decisions about future hikes in interest rates very cautiously. In Wednesday’s meeting, US Fed increased the interest rate by 75 basis points. After the rate hike, the Chief of the US Fed said that he do not think the USA would move into a recession and that inflation would be cooling off soon. But the economic report published on Thursday by the commerce department says otherwise.

Apart from household spending, the report published by the department also shows how business investment and government outlays have deeply declined. Housing projects and investments have also been heavily impacted by the volatile economic condition existing in the United States.

Inflation-adjusted final sales of domestic purchasers declined at a pace of 0.3% in quarter 2. In the earlier quarter, there was a 2% increase in the index.

As US Federal Reserve decided to tighten its monetary policies to curb the high inflation rate, sectors sensitive to interest rates such as the housing sector saw a drop in their economic performance.

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