U.S. Economy Contracted 1%

The U.S. economy contracted less than anticipated in the second quarter as a jump in government spending and smaller cutbacks by consumers helped mitigate a record plunge in inventories.

Gross domestic product shrank at a 1 percent annual rate from April to June, the same as calculated last month, a Commerce Department report showed. Corporate profits rose the most in four years, the department also said.

Companies from Wal-Mart Stores Inc. to Macy’s Inc. cut costs and stockpiles to bolster earnings as job losses caused consumers to curb spending. Leaner stocks and government programs to revive demand, including the cash for clunkers” and first-time homebuyer incentives, are boosting manufacturing and housing, putting the economy on a path to recovery.

Corporate profits, not included in the advance estimate released in July, rose 5.7 percent from the first three months of the year, the biggest increase since the first three months of 2005.

The economy was forecast to shrink at a 1.5 percent pace, according to the median estimate of 75 economists surveyed by Bloomberg News. Estimates ranged from declines of 1.8 percent to 0.8 percent.

The drop was the fourth in a row, the longest contraction since quarterly records began in 1947. The world’s largest economy has shrunk 3.9 percent since last year’s second quarter, making this the deepest recession since the Great Depression.

Today’s report is the second of three estimates on second- quarter growth. The figures will be revised again in September as more information becomes available.

Consumer spending, which accounts for about 70 percent of the economy, fell at a 1 percent pace, less than anticipated, following a 0.6 percent increase in the prior quarter. The decrease subtracted 0.7 percentage point from GDP. Purchases were forecast to drop 1.3 percent, according to the survey median.

Spending is likely to increase this quarter. Industry data showed sales of cars and light trucks rose to an 11.2 million annual unit rate in July, the highest since September.

The cash-for-clunkers” program, which offered buyers discounts of as much as $4,500 to trade in older cars and trucks for new, more fuel-efficient vehicles, produced almost 700,000 automobile sales before ending on Aug. 24, the Transportation Department said yesterday.

Smaller stockpiles will contribute to a rebound in output. Inventories dropped at a $159.2 billion annual rate last quarter, subtracting 1.4 percentage points from growth. They dropped at a $113.9 billion pace in the first three months of the year.

A bigger jump in government spending than previously estimated helped offset the drag on growth from the slump in stockpiles. Federal, state and local expenditures climbed at a 6.4 percent annual pace, the most in more than seven years.

Removing the drop in inventories, the economy grew at a at a 0.4 percent rate last quarter, the best performance in a year.

Reports so far this month have shown government efforts to thaw credit markets and boost housing may be taking hold. Combined sales of new and exiting homes in July reached a 5.67 million annual pace, the highest level since November 2007, the month before the recession began.

U.S. Economy Contracted 1%

TradingEconomics.com, Bloomberg
8/27/2009 9:11:00 AM