Economy seen improving in third quarter

The U.S. economy performed better than expected during the second quarter, but revised data revealed that the intensity of the economic downturn has been much greater than economists thought.

The economy contracted much more slowly in the second quarter than during the previous nine months, signaling that the longest, deepest postwar recession may soon be ending.

The long-awaited economic recovery could begin during the current quarter, many analysts have said, but it will remain weak for at least the rest of the year and probably well into 2010.

Gross domestic product, which measures the output of all goods and services, shrank at a 1 percent annual rate in the April-June period, the Commerce Department reported Friday. It was the fourth consecutive quarter the U.S. economy has declined, something that hasn’t happened since the government started keeping quarterly records in 1947.

The Commerce Department report included comprehensive revisions of GDP data from 1929 through the first quarter of 2009. The revised numbers reveal that the economy deteriorated during 2008 much more than previously reported. Earlier data indicated the economy shrank 0.8 percent during 2008. The revised data reveal a decline of 1.9 percent during 2008.

The second-quarter contraction of 1 percent was much less severe than declines during the previous three quarters, according to the revised data. After shrinking at an annual rate of 2.7 percent during last year’s third quarter, the economy’s descent accelerated to 5.4 percent in the fourth quarter. The 6.4 percent contraction during the first quarter of 2009 was the steepest quarterly downturn since the second quarter of 1980.

“Today’s GDP is an important sign that the economy is headed in the right direction and that business investment, which had been plummeting in the last several months, is showing signs of stabilizing,” said President Obama, who attributed the better-than-expected results to the early impact of his $787 billion economic stimulus package. “Eventually, businesses will start growing and they’ll start hiring again. And that’s when it will truly feel like a recovery to the American people.”

Revised data confirm that this recession, which began in December 2007, is the worst since World War II. However, last quarter’s modest decline in economic activity suggests a recovery could be imminent.

“The U.S. economy is at - or very near - the bottom of the deepest recession of the postwar period,” said Nariman Behravesh, chief economist of IHS Global Insight, who expects the third quarter to register small but positive growth.

“Conditions appear to be stabilizing, and the recession should come to a halt soon,” said Augustine Faucher, an economist at Moody’s Economy.com who also projected “a rebound in the current quarter.”

The rate of contraction significantly slowed in the second quarter because of much smaller decreases in business investment, in exports and in private inventory investment, the Commerce Department said. Also, upturns in government spending at all levels slowed the overall rate of descent.

In the second quarter, consumer spending, which accounts for more than 70 percent of GDP, fell 1.2 percent after rising 0.6 percent during the January-March period. Consumer spending, which had not fallen since the 1990-91 recession, including throughout the 2001 recession, has now declined during four of the last six quarters.

Consumers have tightened the purse strings as home prices have plunged by a third. Also, the value of their stock portfolios, as measured by the broad-based Standard & Poor’s 500-Stock Index, remains 37 percent below its pre-recession peak notwithstanding the market’s impressive 45 percent rally since March. According to Federal Reserve data, household net worth has plunged by more than $12 trillion, or 20 percent, since the recession began in December 2007.

Business investment declined 8.9 percent last quarter, a major improvement after plummeting at a 39.2 percent annual rate during the first quarter. But residential investment, which includes home building, continued its collapse last quarter, falling at an annual rate of 29.3 percent. Residential investment has now declined 14 quarters in a row, a postwar record.

Improvement in the trade sector contributed to last quarter’s modest decline in GDP. The shrinking trade deficit, which occurred as imports declined much more rapidly than exports, contributed 1.4 percentage points to growth last quarter.

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