- The Washington Times - Friday, July 31, 2009

UPDATED:

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.

“But we’re not going to get job growth unless or until we begin to see economic growth, and I think that shows you the degree to which today’s numbers are positive,” Mr. Gibbs said.

The president is scheduled to speak about the economy at 1:15 p.m.

Business investment declined 8.9 percent last quarter, a major improvement after plummeting at a 39.2 percent annual rate during the first quarter. 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

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 GDP growth last quarter.

Exports were down just 7 percent last quarter after plummeting nearly 30 percent during the first quarter. Imports fell 15.1 percent in the second quarter after declining 36.4 percent during the January-March period. Adjusted for inflation, the trade deficit has declined by 55 percent since it reached its peak during the third quarter of 2006.

Federal government purchases of goods and services climbed significantly last quarter, rising 10.9 percent after falling 4.3 percent during the first quarter. Defense spending jumped more than 13 percent.

Since the recession began in December 2007, the economy has lost 6.5 million jobs, including 1.3 million jobs during the second quarter. However, job losses were even greater during the previous two quarters. The economy shed 1.7 million jobs in the fourth quarter, following the freeze in world credit markets. In the first quarter, another 2.1 million jobs were jettisoned. In June, the private sector employed fewer workers than it did at the end of 1999.

The June unemployment rate of 9.5 percent was the highest since 1983. Economists expect the rate to surpass 10 percent later this year, even if the economic recovery begins.

Most economists are projecting a sluggish recovery once it arrives. Growth is not expected to be sufficiently robust to reduce the unemployment rate by a significant amount throughout next year. Economists estimate that roughly 125,000 jobs must be added each month just to keep the unemployment rate from rising.

“The expansion will be weak, given little pent-up demand for autos and housing, which traditionally have led expansions,” said Mr. Faucher of Moody’s, who expects weak growth until the end of next year.

“Private consumption and investment remain weak, thus a rapid, sustained recovery in the traditional style does not seem likely,” said John Silvia, chief economist of Wells Fargo Securities. “Jobs will lag growth as we have witnessed in the prior two recoveries.”

“The early phases of the recovery are likely to be quite weak,” said Mr. Behravesh.

Jon Ward contributed to this report.

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