GDP dips by 1% - less than expected

Optimism grows with second quarter data; fewer workers are claiming jobless benefits

WASHINGTON: The United States economy shrank less than expected in the second quarter and fewer workers filed new claims for unemployment benefits last week, supporting views the economy was starting to heal after a severe recession.

Gross domestic product (GDP) fell at a 1 per cent annual rate, according to a US Commerce Department report yesterday - unchanged from last month's estimate and better than market expectations for a 1.5 per cent contraction.

Many analysts believe the economy is growing in the current third quarter, but they caution that any rebound will not be accompanied initially by rising employment.

The report yesterday found that businesses slashed their inventories more than first reported and cut back more sharply on investment in new plants and equipment. But those reductions were offset by revisions that showed smaller dips in consumer spending, exports and housing construction.

The Commerce Department's preliminary report also showed corporate profits after taxes rose 2.9 per cent in the second quarter, likely a function of cost-cutting measures by companies, after increasing 1.3 per cent in the first three months of the year.

A separate report from the Labour Department yesterday showed that the number of US workers filing new claims for jobless benefits fell last week to 570,000 from an upwardly revised 580,000 the prior week. The tally of those continuing to claim benefits dropped to 6.13 million from 6.25 million, the lowest level since early April.

'We've been expecting to see signs of improvement in the economy consistent with the belief that we'll get growth in the third quarter for the first time in over a year,' said Mr David Resler, chief economist at Nomura Securities, in New York. 'Everything that we've seen in recent weeks reinforces that degree of optimism.'

The 1 per cent decline in GDP in the April-June quarter followed decreases of 6.4 per cent in the first quarter and 5.4 per cent in the final three months of last year, the sharpest back-to-back declines in a half-century. The four straight quarterly declines in GDP, which measures the country's total output of goods and services, mark the first time that has occurred on government records dating to 1947.

The recession that began in December 2007 is the longest since World War II. The world's largest economy has shrunk 3.9 per cent since last year's second quarter, making this the deepest recession since the Great Depression of the 1930s.

The US government found that consumer spending, which accounts for about 70 per cent of total economic activity, fell at an annual rate of 1 per cent in second quarter, a slight improvement from the 1.2 per cent decline reported last month. Residential construction and exports also were revised to show smaller declines.

While data ranging from housing to factory activity continues to suggest the worst recession since the Great Depression has probably ended or is winding down, weak consumer spending is seen holding back the recovery momentum.

Uncertainty over the strength of the recovery has left companies reluctant to start hiring new workers, though the pace of layoffs has slowed down significantly.

Yesterday's report is the second of three estimates on second-quarter growth. The figures will be revised again next month as more information becomes available.

ASSOCIATED PRESS, REUTERS, BLOOMBERG

Source: Straits Times, 28 Aug 2009