GDP contraction slowing

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By David M. Dickson

The U.S. economy shrank at a much slower pace during the second quarter compared with the previous six months, the Commerce Department confirmed Thursday in its first revision of economic activity during the April-June period.

Gross domestic product (GDP) contracted at an annual rate of just 1 percent during the second quarter, the same pace of decline the government reported last month.

GDP had plunged at annual rates of 5.4 percent in the fourth quarter of last year and 6.4 percent during the first quarter.

The much slower decline in GDP during the spring indicated that the economy was about to emerge from its steepest downturn in seven decades. Economic growth, perhaps as fast as 3 percent, could resume during the current quarter, analysts have been predicting.

GDP has now fallen four quarters in a row for the first time since quarterly data became available in 1947. Cumulatively, the U.S. economy has declined by 3.9 percent, its biggest contraction since the Great Depression.

Corporate profits increased 5.7 percent during the second quarter compared with the January-March period, Commerce also reported. It was the biggest upturn in profits since the first quarter of 2005. Profits, however, were still 10.9 percent below their year-earlier levels.

Most economists expected the Commerce Department to revise the second-quarter decline down to about 1.5 percent because inventories fell more than previously reported. The inventory decline was steeper, but that was offset by other revisions.

Government spending, for example, jumped at a 6.4 percent annual rate. That was faster than the 5.6 percent pace first reported, and it was the fastest rate of increase in more than seven years. Trade activity added 1.6 percentage points to second-quarter growth, more than reported last month. Instead of declining 1.2 percent, as first reported, consumer spending fell just by 1 percent last quarter.

Final sales, which adjust GDP for changes in private inventories, actually increased 0.4 percent last quarter after three steep declines.

"Improving final sales and leaner inventories are setting the stage for a return to GDP growth of 3 percent or more in the third quarter," said Nigel Gault, chief U.S. economist for IHS Global Insight.

In labor market news, fewer American workers filed first-time claims for unemployment benefits last week, providing more evidence that the longest economic downturn since the Great Depression is easing. The labor market, however, remains very fragile.

Initial claims for jobless benefits declined by 10,000 to 570,000 for the week ending Aug. 22, the Labor Department reported Thursday.

"Although initial claims are below their March peak, a substantial improvement will be needed before the labor market stabilizes," said Ryan Sweet, an economist at Moody's Economy.com. "The labor market's recuperation will be slow and painful," he added. "With the unemployment rate headed for 10 percent, wage income is forecast to decline well into 2010."

Continuing claims for jobless benefits provided by state programs fell by 119,000 to 6.13 million for the week ending Aug. 15.

State programs normally provide benefits for 26 weeks, after which unemployed workers can apply for the federally funded Extended Benefits program or the Emergency Unemployment Compensation (EUC) program. Workers collecting extended benefits increased by 64,000 to 465,000 for the week ending Aug. 8, while an additional 38,000 workers qualified for EUC benefits that week, bringing its total participation to 2.9 million.

Altogether, more than 10 million workers were collecting jobless benefits for the week ending Aug. 8, the Labor Department reported.