Economic growth rebounds; recession unlikely ahead

McClatchy NewspapersJuly 31, 2008 

The U.S. economy doubled its first-quarter rate of growth to 1.9 percent from April through June, the Commerce Department reported Thursday, and some signs emerged that the U.S. economy may have bottomed out.

Still, everything points to a sluggish second half of 2008, though the risk of recession seems reduced.

"It will be a slog for the economy for the next six to 12 months. The recession may be over, but it won't feel good until this time next year," said Mark Zandi, the chief economist of Moody's Economy.com, a forecaster in West Chester, Pa.

Investors shared that gloomy outlook, as many on Wall Street were disappointed that the GDP report was less robust than widely expected. The Dow Jones Industrial Average closed down 205.67 points, or 1.8 percent, at 11,378.02. The NASDAQ composite index was off 4.17 points, or 0.2 percent, to close at 2325.55. And the Standard & Poor's 500 index dropped by 16.88 points, or 1.3 percent, to close at 1267.38.

Government tax rebates to consumers, federal and state government spending and surging exports were the main sparks to second-quarter growth, which eclipsed the sluggish 0.9 percent rate of the first three months of the year.

Export growth was the highlight of the second quarter, surging 9.2 percent after rising 5.1 percent in the first quarter. While exports have helped to offset the negative pull from the housing crisis, they're expected to slow as inflation and soaring energy prices brake the world economy.

Drags on the economy came from "the usual suspects": housing, residential investment and a drawdown in business inventories. Inventories declined by $62.2 billion; this means that businesses were working their way through their stocks of goods and materials rather than buying more.

That points to a likely rise in business spending later this year, which will spur growth.

"While we expect domestic demand to remain weak going forward, stabilizing inventories will likely provide some positive offset in the second half of the year," Peter Kretzmer, an economist for Bank of America, said in a note to investors.

Business spending will be key to the U.S. economy in the second half of this year because economists expect personal consumption to fall after the stimulus checks that the government began sending in May have been spent.

Personal consumption expenditures rose a sluggish 1.5 percent from April to June. Final sales to domestic purchasers, many of them retailers, are up just 0.8 percent over the same period last year, the weakest performance since the recession of 1990-1991.

This is significant, because consumer spending drives about 70 percent of the U.S. economy, and consumer confidence levels have been at record lows.

"We have long held that the best measure of the economy most consumers interact with on a daily basis is final sales to domestic purchasers. On this basis the economy has actually been weaker than it was in the last recession," Mark Vitner, senior economist with Wachovia, wrote to investors Thursday.

In an interview with McClatchy, Commerce Secretary Carlos Gutierrez disputed the notion that the stimulus checks already have made their impact. He expects them to continue to bump up consumer spending and thus domestic demand for goods and services.

"People will continue spending the stimulus checks in the third quarter and the fourth quarter. That should encourage manufacturers and replenish those stocks," he said. He contended that the checks were "executed very well; it was very timely. That's what these numbers tell me — that in spite of the increases in energy prices."

The GDP report Thursday also revised growth statistics dating to the first three months of 2005. The most telling change involved the 0.6 percent growth rate posted in the final three months of last year. That figure was revised to negative 0.2 percent.

"The revisions show the economy is continuing to operate at a level just slightly better than what we would see in an outright recession," Vitner said. "Growth is narrowly focused, however, with most of the improvement coming from net exports."

The GDP report:

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

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