USA: Pace of GDP Contraction Slowed in Second Quarter

By JEFF BATER and BRIAN BLACKSTONE

WASHINGTON -- The U.S. recession appears to be near an end, government figures suggest, even as revisions to prior years' data show that the downturn has been even more severe than previously thought.

Gross domestic product fell at a seasonally adjusted 1.0% annual rate April through June, the U.S. Commerce Department said Friday in the first estimate of second-quarter GDP. That was better than the 1.5% decline Wall Street economists had expected.

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Stocks for companies that make materials used in manufacturing and construction, such as rolled steel, plastics and packaging, gained some steam Friday in anticipation of an economic recovery later this year. MarketWatch's Christopher Hinton reports. (July 31)

GDP fell 6.4% in the first quarter and 5.4% in the fourth quarter, at the pit of the recession. The third quarter of last year was revised to show a much sharper drop than first estimated. The numbers were revised as part of the government benchmark revision to data going back several decades.

GDP has now fallen four-consecutive quarters, the first time that has happened since quarterly records began being kept in 1947.

But with the pace of decline waning, "the worst recession since the Great Depression is likely coming to an end," said Sung Won Sohn, a professor at California State University.

The main engine of the economy, consumer spending, surprisingly fell last quarter. Job fears and stagnant wages appear to be keeping wallets tight, and are seen muting the economy's expected recovery in the second half of 2009.

What limited the rate of contraction were much smaller declines in exports and business spending. Also, inventory liquidation took less of a bite out of the economy; company replenishing of goods should boost output going forward.

The recession began in December 2007, according to the semi-official arbiter, the National Bureau of Economic Research in Cambridge, Mass. The nonprofit research group uses a broader definition of a recession than do many economists, including industrial production and employment. Another popular definition of a recession is two consecutive quarters of a shrinking GDP.

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In this June 3, 2009 photo, Baldor Electric Co. employees Dave Johnston, left, and Steve Davis, right, work inside the company's factory in St. Louis. A new government report shows the economy sank at a pace of just 1 percent in the second quarter of the year. It was a better-than-expected showing that provided the strongest signal yet that the longest recession since World War II is finally winding down.(AP Photo/Jeff Roberson)
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Baldor Electric employees work inside the company's factory in St. Louis in June, the final month of the second quarter.
In this June 3, 2009 photo, Baldor Electric Co. employees Dave Johnston, left, and Steve Davis, right, work inside the company's factory in St. Louis. A new government report shows the economy sank at a pace of just 1 percent in the second quarter of the year. It was a better-than-expected showing that provided the strongest signal yet that the longest recession since World War II is finally winding down.(AP Photo/Jeff Roberson)
In this June 3, 2009 photo, Baldor Electric Co. employees Dave Johnston, left, and Steve Davis, right, work inside the company's factory in St. Louis. A new government report shows the economy sank at a pace of just 1 percent in the second quarter of the year. It was a better-than-expected showing that provided the strongest signal yet that the longest recession since World War II is finally winding down.(AP Photo/Jeff Roberson)

Economists expect a rise in GDP starting this quarter, suggesting the recession is at or near its end.

"We're going to expect to see growth in the economy in the second part of this year," Federal Reserve Chairman Ben Bernanke said in a town-hall meeting Sunday that was sponsored by the Public Broadcasting Service.

A couple of reports on the economy this week bolstered that case. New-home sales rose a fourth time in six months during June as buyers jumped to take advantage of fallen prices for property. Durable-goods orders fell for the month, but orders outside of transportation rose and a gauge of capital spending by businesses climbed.

Friday's report showed inventory liquidation subtracted less from GDP in the second quarter than it did in the first quarter, 0.83 of a percentage point versus 2.36 percentage points. Economists think companies -- including auto makers amid signs that the government's cash-for-clunkers program is an early success -- will have to restock soon as consumption stabilizes.

"The fact that inventories were still falling in the second quarter raises the odds that they [will] add a huge amount to GDP's plus-column in the third quarter," said Chris Rupkey, economist at Bank of Tokyo-Mitsubishi.

Real final sales of domestic product, which is GDP less the change in private inventories, decreased at only a 0.2% annual rate last quarter, a big improvement from the first quarter's 4.1% slump.

Business spending dropped by 8.9%, after plunging 39.2% in the first quarter. Investment in structures fell 8.9%. Equipment and software spending slid by 9.0%.

About 70% of GDP is made up of consumer spending, which fell 1.2% from April through June, after increasing 0.6% in the first quarter.

Rising unemployment and more precautionary saving will likely keep a lid on spending -- and the economy -- in the second half of this year. Mr. Bernanke said during Sunday's town-hall meeting that he expects GDP to rise only 1%, at an annual rate, in the second half, a rate that is insufficient to prevent further increases in unemployment.

Trade acted as a boost to GDP in the second quarter, adding 1.38 percentage points. U.S. exports fell by 7.0% and imports decreased 15.1%.

Residential fixed investment, which includes spending on housing, plunged by 29.3%, after dropping 38.2% in the first quarter -- demonstrating that the slump in housing continued to take a toll on the overall economy.

Spending by the federal government in the second quarter rose 10.9%, after declining 4.3% in the first quarter.

Inflation remained under wraps. The government's price index for personal consumption expenditures, or PCE, climbed 1.3% after falling 1.5% in the first quarter. The PCE price gauge excluding food and energy rose 2.0%, after increasing 1.1% in the first quarter.

In a separate report, the Labor Department said compensation costs advanced just 0.4% on a quarterly basis between April and June. The 1.8% 12-month rise was the smallest on record, a sign that rising unemployment is taking a toll on paychecks.

Write to Jeff Bater at jeff.bater@dowjones.com and Brian Blackstone at brian.blackstone@dowjones.com