Economy declined a modest 1% last quarter

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The U.S. 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 economic recovery could begin during the current quarter, some analysts have predicted, but it will remain weak for quite some time, they say.

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 had not previously occurred since quarterly data became available beginning in 1947.

The Commerce Department report included comprehensive revisions of GDP data from 1929 through the first quarter of 2009. Most notably, 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, which became progressively worse, according to 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 first quarter’s 6.4 percent contraction was the steepest quarterly downturn since the second quarter of 1980.

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 portfolio, as measured by the broad-based Standard & Poor’s 500-stock index, still remains 37 percent below its pre-recession peak, notwithstanding the market’s 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.

White House press secretary Robert Gibbs said that the most striking news about the report was it showed just how much the economy has contracted since the recession started in December 2007.

“Our first mission in coming to office was to rescue the economy, to stop the slippage, to prevent it from going over the edge,” Mr. Gibbs told reporters in his West Wing office. “We now know how much closer we were from going over the edge now that we have a sense that the recession has been deeper than previously thought.”

Mr. Gibbs credited President Obama with stopping the economy’s free fall but said the administration still has a lot of work to do, “particularly to get people back to work.”

He said that the White House expects the government’s next week unemployment report to show job losses in the hundreds of thousands.

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