During the first and second quarters of this year, the U.S. economy declined at seasonally adjusted annual rates of -1.6% and -0.9%, respectively.

That is a textbook case of an economic recession.

Undeterred, the U.S. government is denying a recession, grasping for all sorts of red herrings to argue that an economy seriously eroded by accelerating inflation is in great shape.

The ultimate recession arbiter is the National Bureau of Economic Research. A recession decision will, therefore, be made in a few months, based on evidence of the extent and scope of decline in variables such as industrial production, employment, real household incomes and the volume of wholesale and retail trades.

Meanwhile, what we are seeing now is a widespread weakening of American economic activity. The household consumption (71% of GDP) has been on a steady decline since the beginning of the year, ending up with a 1% growth in the second quarter.

That reflects a large and worrying 8% fall in households’ real disposable incomes during the first half of this year. And that means that households have been heavily drawing on their savings to maintain their usual consumption patterns. Indeed, the savings rate during the first half of this year went down from 9% to 5%.

Weak and getting weaker

And then, there is the cost of credit that determines demand for consumer goods – especially the “big ticket items,” such as house furnishings and appliances. That section of household spending declined 2.4% in the first two quarters, and that will only get worse as a result of falling incomes, rising consumer debt and increasing interest rates.

Residential investments (3.4% of GDP) are another interest-sensitive component of aggregate demand. They closely interact with households’ consumption and serve as one of its key drivers. Unfortunately, the housing demand came to a halt (0.4%) in the first quarter and collapsed (-14%) during the spring.

So, there goes 75% of the U.S. economy: Household spending and residential investments are being hit hard by falling real disposable incomes and rising credit costs, as consumer debt just reached an all-time high of $16 trillion.

The weakening business investments (19.4% of GDP) are also reflecting an uninspiring sales outlook for the coming months. They declined 13.5% during the second quarter, with particular difficulties noted in business structures and equipment. That is sending a clear message: businesses need no additional machines and factory floors because they can handle expected sales from production capacities they already have.

Adding it all up, 94% of U.S. economy is weak and getting weaker -- in anticipation of further monetary tightening to stop an unrelenting acceleration of price inflation. And a real coup de grace will come from soaring trade deficits. They took an entire percentage point off the GDP growth in the first half of this year.

Don’t antagonize China

The E.U. is a different story. This is a happy vacation time. It is, therefore, bad form to even talk about July’s soaring inflation rate of 9% (quite a jump from 2.2% a year earlier), a 40% increase of energy prices (a three-fold gain from July 2021), or a public debt of 153% of GDP for Italy, and close to 120% of GDP for Spain and France.

The bill, however, will come due next month -- a sacrosanct “rentrée” in France -- when your suntan will be a badge of honor of a good life.

The European Central Bank (ECB) has just raised its policy interest rate to 0.5% -- minus 8.5% adjusted for inflation – with a firm commitment to keep heavily indebted member countries afloat, waiting, apparently, for a miraculous collapse of an energy-driven inflation.

That sounds like a tall order when you want to shut out 40% of Russian oil and gas supplies that the E.U. uses for a normal operation of its economies.

It’s even more difficult to envisage an autonomous inflation retreat when the E.U. seems set to antagonize China and interfere with China trade.

Germany is a stark example of that. Its automobile manufacturers are trying to survive by investing in China. And Germany’s BASF, the world’s largest chemical manufacturer, announced late last month a $10 billion investment in Guandong. In a departure from its normal practice, China allowed BASF to base that business on a wholly owned subsidiary.

Beijing was repaid for that exceptional favor by this week’s comments of Germany’s foreign minister criticizing China for trying to hold at bay what Beijing calls “separatist forces” on the island of Taiwan, in accordance with a universally recognized One-China principle.

But be that as it may, the truth is that the U.S. and the E.U. have to keep open trade flows and increasing energy supplies – if they want to restore price stability and a steady noninflationary economic growth of their economies.