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Economic rebound seen

Sat., Aug. 1, 2009

After GDP shrinks just 1 percent, analysts predict strong recovery

WASHINGTON – The worst recession since the Great Depression is quickly coming to an end, with a fresh report raising hopes that a recovery may be stronger than previously projected.

The government said Friday that the American economy shrank in the second quarter at an annual pace of 1 percent. That was better than the 1.5 percent contraction expected by economists and marked a dramatic improvement from a decline of about 6 percent in the previous six months.

What’s more, the U.S. Commerce Department’s statistics showed the latest recession was even more severe than previously thought. History has shown that deep recessions are often followed by robust recoveries.

Friday’s data indicates, for example, that businesses cut back on inventories by a record amount in the second quarter, suggesting they may have to ramp up production to fill depleted warehouses and store shelves.

“It sets the stage for a stronger recovery,” said Mark Zandi, chief economist at Moody’s Economy .com. “The subsequent recovery will be modest,” he added, “but better than I had thought before today’s numbers.”

Still, trouble spots remain, including rising joblessness.

Since the recession began in December 2007, the nation has lost about 6.5 million jobs, and the government probably will report next week that employers eliminated hundreds of thousands more positions in July.

The unemployment rate, 9.5 percent in June, also is expected to keep rising until at least the end of this year as companies hold off hiring new workers until they are certain the recovery is real.

The government’s report also pointed to danger signs in the commercial real estate market, which includes office buildings and retail stores. Statistics show that before the downturn the commercial construction boom was much bigger than previously thought.

That raises the specter of more defaults and foreclosures in this sector, as well as more trouble for the banks and other financial institutions that lent them money.

Even so, the Obama administration and Democratic leaders in Congress heralded the latest economic data as an indication that the government’s stimulus programs are working and that better days lie ahead.

Without the federal government’s massive $787 billion stimulus plan, the economy would have shrunk by 4 percent in the second quarter, several analysts said.

“I am guardedly optimistic about the direction that our economy is going,” President Barack Obama said Friday, although he noted that there’s much more work to be done.

Many companies are cautious because the future looks cloudy. In particular, any rebound will be keyed to a resumption of robust consumer spending.

Friday’s report showed the personal savings rate, which had been negative in recent years, went up to 5.5 percent in the second quarter.

That means consumers will be in better financial shape to spend, although it’s unclear how much they actually will, given their low confidence, declining wages and concerns about jobs.

Consumer spending, which accounts for about 70 percent of the economy, declined at an annual rate of 1.2 percent in the second quarter – twice the drop that economists were expecting.

“This occurred in the face of gargantuan fiscal stimulus,” said David Rosenberg, economist at investment company Gluskin Sheff & Associates, noting that it raised questions about what would happen to the economy once Uncle Sam’s money recedes.

The two-year stimulus package, which took effect in February, includes payments to retirees, local governments and spending on infrastructure projects. That helped to boost the economy last quarter, and the “cash for clunkers” car-rebate program, which the House moved Friday to support with additional funds, probably will further juice spending and manufacturing.

Overall, many analysts were heartened by the report, and some raised their projections for economic growth Friday. On Wall Street, confidence has been building steadily, with the Dow Jones index gaining 8.6 percent in July – its best performance for the month in 20 years.

Zandi of said he expected the fourth quarter’s gross domestic product, or total goods and services produced, to increase at an annual rate of 2 percent, double his previous forecast.

With the 1 percent decline in the April-June period, GDP has fallen for four straight quarters, the longest downturn since the 1940s.


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