US economy still contracting, but at slower pace

Second quarter GDP declined by 1 percent, compared with 6.4 percent in the first quarter. Will economic recovery be stronger than expected in the second half of the year?

Jeff Roberson/AP
Bill West, an employee at Baldor Electric Co., works inside the company's factory in St. Louis on June 3. A new government report shows the economy sank at a pace of just 1 percent in the second quarter of the year.

It looks as if the worst of the Great Recession is finally behind the nation.

On Friday, the Commerce Department reported that second quarter Gross Domestic Product (GDP), a broad measure of the nation’s production of goods and services, declined by a 1 percent annual rate.

This was a big improvement over the first quarter, which was revised downward to a drop of 6.4 percent annual pace compared with an earlier estimate of 5.5 percent. The sharp change is prompting some economists to wonder if the economic rebound in the second half might be stronger than expected.

“When you get a steep downturn, typically you get a robust recovery,” says John Canally, chief economist at LPL Financial in Boston.

President Obama  seized on the report Friday, telling reporters at the White House that the steps his administration has taken helped “put the brakes on the recession.”

But, he also said, the sharp revisions downward indicated “the recession we faced when I took office was even deeper than anyone thought at the time.”

The stock market appeared to take the news in a positive fashion. As of 1:45 p.m., the Dow Jones Industrial Average was up about 35 points to the 9189 level.

The GDP news "is consistent with the theme that we are close to the bottom for the overall economy,’ adds Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla. “But the pace of recovery is not stellar.”

If the economy does snap back, one main reason will be business replenishing its inventories. In the second quarter, business inventories declined a record $141 billion.

“It sets up for a much stronger second half of the year,” says Mr. Canally. “Business has pared inventory, cut employment almost to the bone, and now they are ready to ramp back up as soon as the economy gets better.”

Cash-for-clunkers' success

One area that may show improvement in the second half of the year is the automobile industry. The so-called “cash for clunkers” program is so successful that dealers have already gone through the $1 billion set aside by the government for the program. The US House approved an additional $2 billion for the program Friday afternoon.

“They sold 250,000 cars in a week. That is a rate of 12 million cars a year and we’re only making 7 million cars,” explains Canally.

However, it’s not clear if that program will continue. According to news reports, the Department of Transportation has told car companies to stop using the program since it’s out of funding. But other reports indicate the White House wants to continue the program.

The latest GDP estimate also indicates that consumers are continuing to keep their wallets in their pockets. In the second quarter, consumption fell at a rate of 1.2 percent compared with a gain of 0.6 percent in the first quarter. In the first quarter, stores were heavily promoting goods that did not sell in the holiday period.

“It looks as if people are still buying things they need, not things they want,” says Canally.

On Tuesday, the government will report personal income and spending for June. “It will help us gauge the momentum going into the third quarter,” says Mr. Brown.

Housing continued to be a drag on the economy, dropping at a 29.3 percent rate. However, this was an improvement over the prior quarter when it fell at an annual pace of 38.2 percent.

Recession looks worse after revisions

This is the fourth consecutive quarter of declining economic activity, and the first time since the Great Depression the economy has shrunk for this long.

The latest economic data reflects major revisions made by the Commerce Department. Most of the data was revised downward. For example, in its new data, the Commerce Department indicated 2008 grew at an annual pace of 0.4 percent instead of the 1.1 percent it had reported earlier.

“The revisions make the recession look worse than it did before,” says Canally. And, Mr. Brown points out, the latest numbers will also be revised.

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