Rebates helped economy in second quarter

WASHINGTON -- The prospects for a quick economic recovery dimmed Thursday, with new data showing the economy grew at a slower-than-expected rate this spring despite some oomph from tax rebate checks -- and actually shrank late last year.

Democrats called for a second economic stimulus package, while the Bush administration said the growth was proof the checks helped.

Armed with government stimulus checks of up to $600 per person, Americans boosted spending on food, clothing and other items in the second quarter, the Commerce Department reported.

But the gross domestic product still increased at a 1.9 percent annual rate, up from 0.9 percent in the first quarter but less than the 2.4 percent economists were looking for.

Government revisions showed the economy actually shrank at the end of last year at a 0.2 percent annual rate. It was the first quarterly dip for the GDP since the 2001 recession.

Meanwhile, the Labor Department said the number of newly laid-off people rose to 448,000 last week, the most in five years. More job cuts are expected in coming months, and Americans may cut back on spending, kindling recession fears.

Wall Street didn't like what it saw. Following two days of gains, the Dow Jones industrials fell 205.67 points to 11378.02.

President Bush acknowledged the economic news was "not as good as we'd like it to be." His commerce secretary, Carlos Gutierrez, said the growth showed the stimulus package was providing some relief.

"Some said the rebates would not have an impact. Well, they were wrong," Gutierrez said. "The stimulus checks are having an impact in spite of the energy prices."

On the campaign trail, the economic policy director for Democratic Sen. Barack Obama said nothing in the new numbers was "positive for families" and said Obama supported a second stimulus package.

Republican Sen. John McCain said the report was disappointing but added that trade "provides one of the few bright spots in an otherwise gloomy economic picture."

Sales of U.S. exports grew at a 9.2 percent pace in the second quarter, up from 5.1 percent in the first quarter. The weak dollar has made U.S. goods cheaper to foreign buyers.

Consumer spending for the second quarter rose at a 1.5 percent rate, better than the first quarter and the best showing since the third quarter of last year, when the economy was still chugging along despite the housing slump.

Slower growth or no, many Americans were grateful for the help as the checks rolled in.

"It was much needed," said Les Jewell, a 32-year-old technology teacher in St. Louis who has a 7-month-old son. "It was very useful, especially when you look at areas like getting formula."

Economists have mixed views on what's to come. A lot hinges on the whims of people who put their rebate checks in the bank: Will they spend them, boosting growth, or keep them stashed away?

There was some evidence Americans saved at least some of the cash. The savings rate rose to 2.6 percent of disposable income, a six-year high.

A growing number of analysts fear that the economy will slip into reverse again at the end of this year, as any effects of the tax rebates disappear. And there are concerns exports could tail off as other countries' economies slow down.

A new poll by the nonpartisan poll by the Pew Research Center released Thursday showed about three in four Americans think the economy is in a recession -- at best -- already. Two in three say their income isn't keeping up with the cost of living.

The GDP report also reflected the continuing fallout in housing. Builders cut back at an annual rate of about 15 percent for the quarter -- although that was a better showing than early this year and late last year.

Businesses trimmed spending on equipment and software and reduced investment in inventories.

An inflation gauge tied to the GDP report showed all prices galloping ahead at a rate of 4.2 percent in the second quarter, the fastest pace since the end of last year.

Taking out energy and food, prices rose 2.1 percent, still outside the Federal Reserve's comfort zone. The Fed meets next week and is expected to hold interest rates steady.

As a general rule, the economy is in recession when it shows two consecutive quarters of contraction.

That didn't happen in the last recession -- in 2001. That was declared a recession by another reading, by a panel of academics at the National Bureau of Economic Research, that usually comes well after the fact.

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AP Business Writer Christopher Leonard contributed to this report from St. Louis.