Economy stops bleeding: Now, let the healing begin

Kansas City StarAugust 1, 2009 

The economy's freefall has stopped, lifting hopes that growth will begin soon. But layoffs likely will continue even into next year.

Economists provided that reading of the tea leaves Friday upon news that the pace of the recession had slowed dramatically.

"The parachute has opened," said Paul Kasriel, chief economist of Northern Trust.

Economists said the report reinforced their belief that the economy will start to grow again in the second half of this year. But they generally forecast a sluggish rebound in which businesses continue to trim payrolls into next year. Moreover, employers likely will take their time adding back workers.

"There's not much doubt about it," said Chad Stone, chief economist for the Center for Budget and Policy Priorities in Washington. "It's great that we seem to be bottoming out, but we're still in a deep hole."

Although the economy's second-quarter decline was less than expected, there were concerns that consumer spending was weaker than forecast. Spenders, who account for 70 percent of economic activity, doubled the pace of their retreat from the first quarter, preferring instead to bolster savings.

Overall, the continued decline means consumer purchases now have fallen 2 percent from a peak at the end of 2007, the largest drop since the early 1980s recession.

Measuring the entire economy's decline, economist Mark Zandi at Moody’s Economy .com said the newest report shows the national output has receded 3.9 percent so far. The decline makes this the deepest recession since the Great Depression, exceeding the 3.8 percent drop during the 1957-58 recession.

Friday's news on other parts of the economy buoyed expectations for second-half growth. Business investment, exports and housing continued to fall, but at slower paces than before.

Earlier economic reports showed housing prices may have begun to rebound in many of the hardest-hit markets.

Government spending jumped in the second quarter, Friday's report showed, reflecting the first rounds of the $787 billion economic stimulus set to roll out through next year and beyond.

Economist Michelle Meyer said federal spending will play a greater role in boosting growth in the second half of this year.

"That's when a lot of this discretionary spending filters into the economy," she said.

That's in line with Deputy Treasury Secretary Neal Wolin’s comments before the Friday report. Wolin had said the planned pace is to have 70 percent of the money deployed by the fall of next year.

Friday's report did not include any impact from the wildly popular $1 billion cash-for-clunkers program, which ran out of money in a week. Congress, however, acted quickly Friday to boost the program, with the House of Representatives approving $2 billion more and the Senate planning to act next week.

Read more at KansasCity.com

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