US Economy Shrank 0.7%

The world’s largest economy shrank at a 0.7 percent annual rate from April through June, the best performance in more than a year, revised figures from the Commerce Department showed today in Washington. Gross domestic product contracted at a 6.4 percent pace in the first three months of 2009.

Government stimulus plans such as cash for clunkers” and first-time homebuyer credits are giving manufacturing and housing, the two areas at the center of the economic slump, a boost this quarter. Federal Reserve policy makers are among those concerned that gains in consumer spending will not be sustained as unemployment climbs and incomes stagnate.

The drop in GDP was the fourth in a row, the longest contraction since quarterly records began in 1947. The world’s largest economy shrank 3.8 percent since last year’s second quarter, making this the deepest recession since the 1930s.

Consumer spending, which accounts for about 70 percent of the economy, fell at a 0.9 percent pace last quarter, less than the government previously estimated. The median forecast of economists surveyed projected spending would be unrevised at a 1 percent drop.

Purchases are recovering this quarter. Sales at retailers surged in August by the most in three years, boosted by demand for automobiles as Americans rushed to take advantage of the cash for clunkers” plan, figures from the Commerce Department showed earlier this month.

A smaller decline in business investment on equipment and software than previously estimated also contributed to the improved reading on GDP, the report said. Such spending fell at a 4.9 percent annual pace, compared with the 8.4 percent decline announced last month.

Today’s report showed the record drop in stockpiles in the second quarter was even larger than previously estimated, paving the way for gains in manufacturing in the second half of the year. Automakers General Motors Co. and Ford Motor Co. are among firms boosting production in coming months.

Government spending climbed at a 6.7 percent pace last quarter, more than previously estimated and the biggest gain in more than seven years. The Obama administration’s $787 billion stimulus plan means such expenditures will keep rising in coming quarters.

The Fed’s preferred measure of inflation, which is tied to consumer spending and strips out food and energy costs, rose at a 2 percent annual rate, the same as the government previously estimated and matching economists’ forecasts.

The drag from residential construction, which subtracted 0.7 percentage point from growth last quarter, is dissipating, economists said. Sales of new homes rose in August to the highest level in almost a year, and a report yesterday from S&P/Case-Shiller showed house values in 20 cities climbed in July from the prior month by the most since 2005.

Finally, today’s report showed corporate profits climbed 3.7 percent in the second quarter, the second consecutive gain.

US Economy Shrank 0.7%, Bloomberg
9/30/2009 9:46:54 AM