Economy's small drop in second quarter hints at recession ending

WASHINGTON -- The economy shrank at an annual rate of 1 percent in the spring, a better-than-expected showing and more evidence that the recession is drawing to a close.

Many analysts believe the economy is growing in the current quarter, but they caution that any rebound will not be accompanied initially by rising employment. Jobless claims figures released Thursday were better than expected, but remain well above levels associated with a healthy economy.

Americans may see little benefit from a recovery if jobs remain scarce and consumer spending stays too low to fuel a strong economic rebound.

The Commerce Department's new estimate for the gross domestic product was unchanged from the initial figure it released last month. The drop, while representing a record fourth consecutive decline, was far smaller than the previous two quarters. It also was stronger than the 1.5 percent decline that private economists expected.

The report Thursday 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 1 percent rate of decline in the April-June quarter followed decreases of 6.4 percent in the first quarter and 5.4 percent in the final three months of 2008, 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 that date to 1947.

The recession that began in December 2007 is the longest since World War II, and the deepest in terms of the drop in the GDP, which is down 3.9 percent from its previous peak.

But economists are heartened that the decline slowed to 1 percent in the spring. Many analysts think that the government's $787 billion economic stimulus plan and the Cash for Clunkers program to boost car purchases will lift GDP growth to around 2 percent in the current July-September quarter.

However, the return to economic growth will not mean more jobs, at least at first. Economists believe the unemployment rate, currently at 9.4 percent, will keep rising through the spring of next year.

The Labor Department said Thursday that first-time unemployment claims fell to a seasonally adjusted 570,000, from an upwardly revised 580,000 the previous week. The tally of those continuing to claim benefits dropped to 6.13 million from 6.25 million, the lowest level since early April.

The weekly figures remain far above the roughly 325,000 that analysts say is consistent with a healthy economy. New claims last fell below 300,000 in early 2007.

White House economic adviser Christina Romer earlier this week said the unemployment rate is likely to keep rising and hit 10 percent this year. That could discourage consumer spending and weaken any recovery. Economists expect the unemployment rate inched back up to 9.5 percent in August as another 220,000 jobs were lost, down a bit from 247,000 in July. That report is scheduled for release next week.

On Wednesday, reports showed that new home sales jumped almost 10 percent from June, while orders for durable goods like appliances, planes and computers rose nearly 5 percent in July, the third increase in the past four months.

Still, it remains unclear whether the growth can be sustained. Though the increases in housing sales and manufacturing last month were dramatic, they came from extraordinarily low levels and were fueled by temporary government programs like Cash for Clunkers and tax credits for home sales.

On Wall Street, stocks fell as analysts said the market was running out of reasons to move higher without more convincing signs of an economic recovery. The Dow Jones industrial average lost more than 70 points in morning trading, and broader indices also dropped.

The government makes three estimates of the economy's performance for any given quarter. Each new GDP estimate is based on more complete information.

Economists had expected that the second look at GDP for the spring would show the economy contracting at a 1.5 percent rate because they believed companies had cut back more sharply on their inventories.

While inventories were cut more than initially estimated, that weakness was offset by upward revisions in other areas.

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

Federal Reserve Chairman Ben Bernanke said last week the economy appeared to be "leveling out," and was likely to begin growing again soon. President Barack Obama appointed Bernanke to another 4-year term Tuesday.

The clunkers program, which provides consumers rebates of up to $4,500 for turning in old gas-guzzlers for fuel-efficient cars, has helped spur activity in the auto and related industries. The economy also has been helped by stabilization in the housing sector, as sales of new and existing homes have risen for four straight months.