Situation report: Economy stable, corporations cautious

Improving US economy shows 1.0% contraction
Posted: 31 July 2009 2145 hrs

	Photos 1 of 1 Shoppers pass along a retail strip in Greenwich, Connecticut.

WASHINGTON: The US economy narrowed its contraction to 1.0 per cent in the second quarter, the government said Friday, offering further evidence that the brutal recession is near an end.

The Commerce Department report was stronger than expected by private forecasters who had called on average for a 1.5 per cent annualised pace of contraction for the April-June quarter.

The report showed an easing of the economic slump and lent credence to predictions that the world's biggest economy was close to emerging from a recession that began in December 2007 after a bursting of a housing bubble.

"The small contraction in the economy in the second quarter is another indication that the recession will soon end," said Augustine Faucher, economist at Moody's Economy.com.

"We're seeing signs of stabilisation in a lot of areas of the economy, so the worst is definitely behind us," said Scott Brown, chief economist at Raymond James & Associates.

"We are close to a bottom in the overall economy but the recovery will be weak with continuing problems in the labor market."

The agency's latest revisions showed a 6.4 per cent decline in the first quarter, worse than the previous estimate of a 5.5 per cent drop.

In the fourth quarter of 2008, the drop was revised to 5.4 per cent instead of 6.3 per cent.

The report showed the annualised value of GDP in the second quarter at US$14.149 trillion.

Many segments of the economy remained extremely weak. Private investment was down 20.4 per cent, but that was better than a 50 per cent plunge in the first quarter.

Consumer spending, the main driver of economic activity, fell 1.2 per cent after a rise of 0.6 per cent in the first quarter.

The report also marked four consecutive quarters of economic contraction for the first time since these records were started in 1947.

But positive contributions came from increased auto production and trade.

Real final sales of domestic product - a key figure that strips out inventory adjustments - showed a 0.2 per cent drop in the second quarter, compared with a decrease of 4.1 per cent in the first.

The report showed a turnaround driven in large part by government spending and exports.

Federal government expenditures and investment increased 10.9 per cent in the second quarter, in contrast to a decrease of 4.3 per cent in the first. That included defense expenditures up 13.1 per cent.

The positive contribution to GDP from trade came despite a drop in exports linked to weakness in the global economy. Exports of goods and services decreased 7.0 per cent in the second quarter while imports fell 15.1 per cent.

Because that meant more production was brought home, this was a positive factor for GDP.

The GDP report will be revised next month and again in September with more accurate figures on trade, which were not available for the current GDP report.

Many private and government economists see a return to growth in the second half of the year, although some warn that rising unemployment could dampen any recovery.

The jobless rate hit a 26-year high of 9.5 per cent in June amid more retrenchment by employers. Some expect the jobless rate to rise to 10 per cent or higher.

The US Federal Reserve this month raised its outlook for 2009 and 2010 economic output, projecting a rebound in the second half of 2009 that would leave the contraction for the year at between 1.0 and 1.5 per cent.

For 2010, the new Fed outlook saw growth in a range of 2.1 to 3.3 per cent, slightly better than its forecast in April.