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Economy dips at better-than-expected pace of 0.7 percent in spring, probably growing now

September 30th, 2009 12:00 am by Associated Press

WASHINGTON (AP) -- The economy shrank less than expected in the second quarter as businesses and consumers trimmed their spending at a slower pace, buttressing beliefs that the economy is now growing.


The 0.7 percent dip in gross domestic product for the April-June quarter follows the 6.4 percent annualized drop in the first three months of this year, the worst slide in nearly three decades. In the final quarter of last year, the economy sank at a rate of 5.4 percent


The new reading on second-quarter GDP, reported by the Commerce Department on Wednesday, shows the economy shrinking less than the 1 percent pace previously estimated. It also was better than the annualized 1.1 percent drop that economists were predicting.


The final revision of second-quarter GDP comes on the last day of the third quarter, in which many analysts predict the economy started growing again at a pace of about 3 percent.


"Growth should be solidly positive," said Mark Vitner, economist at Wells Fargo Securities.


Gross domestic product measures the value of all goods and services - from machines to manicures - produced in the U.S. It is the best estimate of the nation's economic health.


A main reason for the second-quarter upgrade: businesses didn't cut back spending on equipment and software nearly as deeply as the government had thought. Consumers also didn't trim their spending as much.


But on Wall Street, a surprise drop in the Chicago Purchasing Managers Index, considered a precursor to the national Institute for Supply Management index to be released on Thursday, sent stocks reeling. The Dow Jones industrial average lost more than 80 points in midday trading, and broader indices also fell.


Many analysts predict the economy started growing again in the July-September quarter, due partly to President Barack Obama's $787 billion stimulus package and the government's now defunct Cash for Clunkers program, which had ginned up auto sales. It offered people rebates of up to $4,500 to buy new cars and trade in less efficient gas guzzlers.


Earlier this month, Federal Reserve Chairman Ben Bernanke said the recession, which started in December 2007, is "very likely over."


But he warned that pain will persist - especially for the nearly 15 million unemployed Americans.


Because the recovery is expected to slow to a more plodding pace in the coming months, the nation's unemployment rate - now at a 26-year high of 9.7 percent - is expected top 10 percent this year. Economists predict it will have nudged up to 9.8 percent for September when the government releases that report Friday.


The economy has now contracted for a record four straight quarters for the first time on records dating to 1947, underscoring the toll the recession has taken on consumers and businesses. Economic activity shrank 3.8 percent since the second quarter of last year, marking the worst recession since the 1930s.


In the second quarter, consumers trimmed their spending at a rate of 0.9 percent. That was slightly less than the 1 percent annualized drop estimated a month ago, but marked a reversal from the first quarter when consumers boosted spending 0.6 percent.


Many analysts predict that consumer spending will move back into positive territory again in the third quarter. But worries linger that rising unemployment and still hard-to-get credit could crimp such spending, which accounts for about 70 percent of economic activity, and hobble the recovery.


Those potentially negative forces - along with the troubled commercial real-estate market - provide reasons for caution, a Fed official said Wednesday.


"We all ardently want to believe the nation is on the economic comeback trail," Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said in a speech in Mobile, Ala. "I don't think we are served by declaring prematurely that we're in the clear. In thinking about the recovery, I recommend for now a mindset of measured optimism."


Meanwhile, less drastic cuts in business spending contributed to the second-quarter's improved showing.


Businesses trimmed spending on equipment and software at a pace of 4.9 percent. That wasn't as deep as the 8.4 percent annualized drop previously estimated for the second quarter, and marked a big improvement from an annualized plunge of 36.4 percent in the first quarter.


A key area where businesses did cut more deeply in the spring was inventories.


They slashed spending at a record pace of $160.2 billion. But there's a silver lining to that: With inventories at rock-bottom, businesses have started to boost production to satisfy customer demand, one of the forces that should lift GDP in the third quarter, analysts say.


The report also showed that after-tax profits of U.S. corporations rose 0.9 percent in the spring, the second straight quarterly gain.


Spending on housing projects fell at a rate of 23.3 percent in the second quarter, also not as deep as the annualized drop of 38.2 percent in the first quarter.

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