GDP Falls Further in Q2, Fueling Talk of a Recession

Gross domestic product declined at an annualized pace of 0.9% in the second quarter, marking two consecutive quarters of economic contraction.

While the report on Thursday morning was worse than economists' forecasts of a 0.5% contraction, it was slightly better than "whisper" expectations for a decline of 1% or more. The Federal Bank of Atlanta's GDPNow tracker, for instance, predicted a 1.2% decline in GDP in the second quarter.

Bitcoin (BTC), which had risen sharply in the wake of Wednesday's downgrade of the economy by the U.S. Federal Reserve, slipped $200 following the release of the GDP figure and was recently trading at $22,800.

Th GDP report cited "decreases in private inventory investment, residential fixed investment, federal government spending, state and local government spending and nonresidential fixed investment that were partly offset by increases in exports and personal consumption expenditures" as the main drivers for the decline.

The contraction follows an unexpected decline in economic activity of 1.6% in the first quarter, which fueled fears of recession. One widely used definition for a recession is when GDP contracts in two consecutive quarters.

However, many economists – and even Federal Reserve Chairman Jerome Powell at a press conference on Wednesday – have refrained from calling a recession because other factors like the labor market show signs of a strong economy. Both the government and the Fed defer to the National Bureau of Economic Research (NBER) to declare a recession, which takes into account employment, personal income and industrial production, in addition to GDP.

“I do not think the U.S. is currently in a recession and the reason is there are too many areas of the economy that are performing too well,” Powell said during a press conference on Wednesday. “You tend to take first GDP reports with a grain of salt."

Central bankers on Wednesday raised the federal-funds rate by 0.75 percentage point, or 75 basis points, in an effort to slow the economy and curb four-decade high inflation. Traders interpreted the statement by the rate-setting Federal Open Market Committee as dovish, with stocks jumping after the announcement.

Bitcoin saw its biggest single-day gain in six weeks, surging 8% on Wednesday to $23,416. Ethereum (ETH) rose almost 12% to slightly above $1,600.

Even if the economy isn’t in a recession, raising interest rates for the fourth consecutive month could certainly lead to one, and Powell has repeatedly said that a recession is “a possibility.”

“The Fed can't say, we're trying to push the economy into a recession, but in my opinion they are, because that's the only thing that's going to slow down prices,” Bob Iaccino, chief strategist at Path Trading Partners and co-portfolio manager at Stock Think Tank, said.

“They have no control over Russia, which is part of the inflation problem. They have no control over the supply chain, which is part of the inflation problem. The only thing they can try and do is slow demand,” he said.