Top Economist Issues Warning as US GDP Declines for Second Straight Quarter

A top U.S. economist issued a warning after a report Thursday showed the United States posted a second consecutive quarter of negative growth.

Gross domestic product fell at a 0.9 percent annualized rate last quarter, the federal government said. The country’s GDP contracted at a 1.6 percent pace in the first quarter.

Mohamed A. El-Erian, a former Obama administration official and the president of Queens’ College at the University of Cambridge, said the numbers show it’s “an economy that’s weakening at a much faster rate than most people expected.”

“Inflation is not going to come down fast enough given how fast the economy is weakening and that’s going to put the Fed in the same dilemma it been in,” El-Erian told CNBC on Thursday morning. He added on Twitter that with an “unfavorable miss on jobless claims” combined with the negative GDP, there is a risk of “deepening stagflation and flashing red recession.”

While a second straight quarterly decline in GDP meets the standard definition of a recession, the National Bureau of Economic Research, the official arbiter of recessions in the United States defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators.”

The White House has tried to downplay the GDP report and argued that the United States currently isn’t in a recession. President Joe Biden issued a statement Thursday saying that other economic indicators such as the job market and consumer spending are strong.

Job growth averaged 456,700 per month in the first half of the year, which is generating strong wage gains. Still, the risks of a downturn have increased. Homebuilding and house sales have weakened while business and consumer sentiment have softened in recent months.

But squabbling over the definition of a recession, El-Erian said, is “not as interesting as we are weakening really fast” before concluding that “we’re not out of stagflationary forces yet.”

The Consumer Price Index, one of the metrics of inflation, rose 9.1 percent in June, according to the Bureau of Labor Statistics. That’s the highest level since 1981.

Higher interest rates could bring down inflation, but such a reduction won’t happen quickly enough due to “how fast the economy is weakening,” he argued. The Federal Reserve, which raised interest rates by 75 basis points on Wednesday, is now in “a dilemma” about how to handle its monetary policy, the economist added.

“I hope [the Fed] focuses on putting the inflation genie back into the bottle. I think the worst outcome is that next year, we are in a recession and inflation has proven very sticky,” El-Erian continued.

Reuters contributed to this report.