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A Hint of Recovery: Report shows economy shrank at an annual rate of just 1 percent in 2nd quarter
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Steve Costa of Barnstead, N.H., interviews for a job during a job fair at New Hampshire Motor Speedway in Loudon, N.H.
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Published: August 28, 2009
WASHINGTON - Further evidence that the recession is ending came in a report yesterday confirming that the economy shrank at an annual rate of just 1 percent in the spring.
Many analysts say that growth likely returned in the current quarter. Smaller dips in consumer spending and other areas during the April-June period led some economists to raise their forecasts for the July-September quarter.
But with claims for unemployment aid stubbornly high, Americans may benefit little from a recovery if jobs remain scarce and spending stays too low to fuel a strong rebound.
The Commerce Department estimated that the U.S. gross domestic product, the broadest gauge of economic health, shrank at an annual rate of 1 percent in the second quarter. The new estimate of the nation's output of goods and services was the same as an earlier estimate released last month.
The negative figure marks a record fourth consecutive quarterly decline.
But it was far smaller than the nosedive that the economy had taken during the previous two quarters.
Businesses did cut inventories at an even greater rate than had been expected in the spring.
But economists were encouraged by upward revisions to consumer spending, exports and housing construction. Analysts had expected the second-quarter economic figure to show a drop of 1.5 percent.
"The big surprise in this report was that there was enough spending in the consumer sector and elsewhere to offset all the loss from inventory reductions," said Nigel Gault, the chief U.S. economist at IHS Global Insight.
Consumer spending, which accounts for about 70 percent of total economic activity, fell at an annual rate of 1 percent in the second quarter. It was a slight improvement from the 1.2 percent decline reported last month.
Gault predicted that the economy will gain momentum in the current quarter and final three months of this year as businesses switch from trimming stockpiles to rebuilding inventories. He expects the GDP to jump to above 3 percent in the July-September quarter, boosted by the "Cash from Clunkers" auto program.
Growth likely will remain around 3 percent in the fourth quarter, Gault said. But then it could slip in the first half of next year as the support from inventory rebuilding begins to fade. Consumers, faced with bleak job prospects, won't likely be able to take up the slack, he said.
Unemployment is not expected to peak until next spring, probably somewhere above 10 percent. The jobless rate is now 9.4 percent.
Christina Romer, the White House economic adviser, said earlier this week that the unemployment rate is likely to hit 10 percent this year. Economists say they think that the unemployment rate will inch back up to 9.5 percent for August, with 220,000 more jobs lost, down a bit from 247,000 in July. That report is scheduled for release next week.
The 1 percent dip in GDP in the April-June quarter followed declines of 6.4 percent in the first quarter and 5.4 percent in the final three months of 2008, the sharpest back-to-back declines in more than 50 years. The four straight quarterly declines in GDP mark the first time that has occurred on government records dating to 1947.
The recession that began in December 2007 is the longest since the Great Depression. It's also the deepest as measured by the drop in GDP, which is down 3.9 percent from its previous peak.
Even though economists say they expect the economy to start growing again in the current quarter, signaling the end of the recession, that won't mean the end of job losses. Businesses likely will continue to keep tight control over labor costs until they see more evidence that the recovery will not falter.
Some analysts say they worry that the country could face a double-dip recession in which growth returns for a while, only to falter again as beleaguered consumers remain reluctant to increase spending.
First-time unemployment claims fell to a seasonally adjusted 570,000, from an upwardly revised 580,000 the previous week, the Labor Department said yesterday. The number of those continuing to claim benefits dropped to 6.13 million from 6.25 million, the lowest level since early April.
The weekly figures remain far above the estimated 325,000 claims that analysts say is consistent with a healthy economy. New claims last fell below 300,000 in early 2007.
Reports released Wednesday showed that new-home sales jumped almost 10 percent from June, while orders for durable goods like appliances, planes and computers rose nearly 5 percent in July. Those increases, however, came from extraordinarily low levels and were fueled by temporary government programs and tax credits for home sales.
On Wall Street, stocks overcame early losses and finished slightly higher, including the Dow Jones industrial average, which added 37 points to set a fresh 2009 high. The Dow has risen for eight straight days, its longest winning streak since April 2007.
The Dow rose 37.11, or 0.4 percent, to close at 9,580.63. The Dow's eight-day advance totals 445 points, or 4.9 percent.
The Standard & Poor's 500 index rose 2.86, or 0.3 percent, to 1,030.98. The Nasdaq composite index rose 3.30, or 0.2 percent, to 2,027.73.
Included in yesterday's report was the first look at corporate profits for the second quarter. The government estimated that profits rose 5.7 percent in the second quarter, the biggest increase since the first quarter of 2005. Analysts said that the gain came primarily from widespread layoffs and other attempts to trim costs.
"The corporate cost-cutting led to the solid increase in earnings despite the decline in (economic) growth," said Joel Naroff, the chief economist at Naroff Economic Advisers.
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