U.S. Economy Shrink Slows; Consumer Weakness

123jump.com Staff
31 Jul, 2009
New York City

The economy contraction in the second quarter slowed to an annual rate of 1% after falling at 6.4% in the first quarter and 5.4% in the fourth quarter of last year. The smaller decline in GDP reflected a rise in government spending and smaller decline in fixed investments and private inventories.

[R]2:30 PM New York – The economy contraction in the second quarter slowed to an annual rate of 1% after falling at 6.4% in the first quarter and 5.4% in the fourth quarter of last year. The smaller decline in GDP reflected a rise in government spending and smaller decline in fixed investments and private inventories.[/R]

The preliminary estimate of gross domestic product showed a decline of 1% in the second quarter ending in June from the first quarter. The annual rate of decline slowed sharply after the economy shrank at 6.4% in the first quarter and 5.4% in the last quarter of 2008.

The estimates of the second quarter are preliminary and will be revised in less than six weeks.

The inventory liquidation helped the economic decline to slow but consumer spending and growth in international trade remained weak.

GDP has declined for the four quarters in a row, the first back-to-back decline for that many quarters since the record keeping began in 1947.

Disposable personal income increased 4.6% to $121.1 billion in the quarter but personal outlay decreased 0.7%. Personal savings rate increase to 5.2% from 4% in the first quarter as consumers face rising unemployment and falling home prices.

Inventory Liquidation Continues

Despite businesses rebuilding inventories, private inventories declined in the $141.1 billion in the second quarter after decreasing $113.9 billion in the first quarter and $37.4 billion in the fourth quarter.

This decline in inventories suggests that in the third quarter GDP calculation the change in inventories will add rather than subtract to the GDP data.

Smaller declines in exports and business spending limited the GDP shrinkage.

Even though the consumer spending is the largest part of the economy, it is the surge in federal government spending that is contributing to the economy. Real federal spending in the second quarter increased 10.9% compared to 29.9% decrease in the first quarter.

U.S. Consumer Spending Weak

Purchases by U.S. residents that included imported items declined 2.3% in the quarter after falling 8.6% in the first. Personal outlays that excluded imports fell 0.7% in the quarter compared to a fall of 1.1% in the first.

Real imports of goods and services decreased 15.1% compared to 36.4% in the first quarter.

Though the measure of inflation suggests that prices are in check, but the price index for gross domestic purchases increased in the quarter.

The index increased 0.7% in the second quarter after falling at 1.4% in the first quarter and excluding food and energy prices, the index surged 1.1% compared to 0.2% in the first.

Estimates Revisions

The estimate of the current economic contraction was increased in the latest multi-year revision.

The U.S. Commerce Department also revised GDP data for several quarters dating back 1997 and several annual adjustments reflecting period between 1929 and 2008.

In the revised estimates, real GDP increased 0.4% in 2008 compared to previous estimate of 1.1% increase. Real GDP from the fourth quarter of 2007 to first quarter of 2009 decreased at average annual rate of 2.8% compared to previous estimate of 1.8% decline.