Economy in U.S. Shrank at a 0.7% Annual Rate in Second Quarter


The worst U.S. recession since the Great Depression eased more than anticipated in the second quarter, setting the stage for a recovery to take hold in the last half of 2009.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 home buyer 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.

“It’s a much better picture than a few months ago,” Lindsey Piegza, an economist at FTN Financial in New York, said before the report. “Inventories and government programs will drive growth in the second half. We’re expecting a mild recovery as the job market is still very weak.”

The drop in GDP, the sum of all goods and services produced, was less than the 1.2 percent median forecast in a Bloomberg survey of 78 economists. Estimates ranged from declines of 1 percent to 1.5 percent. The government previously calculated the pace of contraction at 1 percent last quarter.

This is the last of three estimates the government issues on economic growth.

                       Deepest Recession

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.

                       Inventories Plunge

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.
Fed policy makers last week said they would keep the benchmark lending rate near zero “for an extended period,” and noted that household spending, while showing signs of stabilizing, was still being constrained by “job losses, sluggish income growth, lower housing wealth, and tight credit.”


                        ‘Slow’ Recovery

The economic recovery is “slow but certain,” FedEx Corp. Chief Executive Officer Fred Smith said this week, adding he has “guarded confidence” about an improving global outlook.“Recovery is not a straight line up, but a zig-zag with a few steps forward and backward,” Smith, the founder of the second-largest U.S. package-shipping company, said at FedEx’s annual meeting in its hometown of Memphis, Tennessee.

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.
 

The economy will expand at an average 2.6 percent pace in the second half of the year, according to the median estimate of economists surveyed by Bloomberg earlier this month.

The jobs report in two days may show payrolls declined by 180,000 in September after a 216,000 drop the prior month, and the unemployment rate climbed to 9.8 percent from 9.7 percent,the survey median shows. Economists surveyed by Bloomberg predict unemployment may reach 10 percent by year-end, the highest level since 1983.

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

(Source: Bloomberg News)

World Economy: Nobel Winner Krugman Says -End of World Postponed

The global economic downturn has probably hit bottom though the recovery will be “slow and painful,” said Paul Krugman, the Nobel Prize winning economist.

“The end of the world appears to have been postponed,” 

Krugman, a professor at Princeton University, said at a seminar in Helsinki today. The world economy “does not appear to be falling into an abyss but is still” in trouble.

The outlook is “very fuzzy’ and a W-shaped recovery may become U-shaped.Germany, France and Japan emerged from recession last Quarter, adding to evidence some of the world’s biggest Economies are over the worst. The U.S. recession probably endedin late July or August, Krugman said, after gross domesticProduct fell 1 percent in the second quarter from the prior
three months.

The Nobel Laureate said ‘‘the truly extraordinary thing”has been “the collapse of world trade,” the subject for whichhe was awarded the prize last year, and he cast doubt on the potential for exports to lead the global recovery. He also said China’s economy isn’t big enough to serve as a growth engine.

“The problem is that this is a global financial crisis,”he said. “How can we have an export-led recovery unless we find another planet to export to?”

                          No Locomotive

 Krugman questioned whether China’s economy is large enough to be a locomotive of recovery.

“One of the reasons it’s so difficult to tell a story about a fast recovery is the large surpluses in Asia,” he said.

“If they can find a serious increase in consumer demand, that would help. We don’t really understand why the Chinese savings rate is so high, but it’s probably due to” large precautionary savings.

He warned that any decision by China to diversify its Currency reserves away from the dollar would “hurt Europe and Japan the most.”

While budget deficits “saved the world” in the short term, “for most people things are going to get worse,” he
said. “Governments can help us cope with the crisis, but they have levels of debt that are sufficiently high to be a source of concern.”

Even so, the recovery remains too frail to warrant scaling back support measures, he said. “Exit from stimulus should certainly wait until we have clear signs that we’re closing the output gap. This is no time to start exiting stimulus.”

                          ‘Don’t Panic’

Economies can “suffer” more than necessary if governments introduce austerity measures prematurely, Krugman said.

“Obviously deficits are building up, but to respond with severe cuts increases the human and the economic cost right away. You do not want to inflict upon yourself the equivalent of an IMF program. You want to avoid doing that if you can. You have to keep an eye on the debt numbers but not panic over them
if you can avoid it.”

While, last quarter’s drop in U.S. GDP was the fourth in a row, the longest contraction since quarterly records began in 1947, Krugman said the U.S. has $1.1 trillion in annual capacity “staying idle.” T he U.S. consumer “that’s been such an important driver of the global economy, is exhausted,” he said, forecasting U.S. unemployment may rise until early 2011.

                        Reason to Invest

 Leading the recovery will be business investment, he said, “but what’s going to drive business investment? It would be very helpful if someone could” make a discovery that would lead us out of this recession. “If we can introduce effective climate change policies, particularly the cost of carbon emissions,” that “would be a reason to invest.”

A “good” agreement at the forthcoming international climate change summit in Denmark “wouldn’t just be good for the planet, it would be good for the recovery,” Krugman said.The crisis has hurt the euro in its ‘competition’ with the dollar, he said. “The international role of the euro is that it has suffered a setback. The crisis has not been good for the euro and its competition with the dollar as the international
reserve currency.”
Krugman said he was concerned global efforts to emerge from the crisis “could just drag on and on for a long, long time.”

“The consequences of that are that you start to have problems with financing the debt and you start to have social and political problems,” he said. My great concern is that this just drags on and on with severe consequences for political and social stability.’’

History is no guide to a path to recovery, he said. “The trouble is, we really have no road maps. The only
model is the Great Depression itself.” That “was ended by a very large spending program known as World War II and we don’t Really want to repeat that.”
(source: Bloomberg News)