GDP falls at 1% rate in Q2, less than expected

The economy contracted at a 1% annual rate in the spring, a strong sign recession is winding down, and President Obama said Friday that it got a boost from the $787 billion economic stimulus program Congress enacted within weeks of his taking office.

Commerce said Friday that the 1% dip in gross domestic product for the April to June period came after the economy tumbled at a terrifying 6.4% pace in the first three months of this year and a steep 5.4% drop the quarter before that. The 6.4% drop was the sharpest downhill slide in nearly three decades.

Many economists were predicting a slightly bigger 1.5% annualized contraction in second-quarter GDP, the total value of all goods and services produced within the United States.

Obama told reporters that some of the recent progress is "directly attributable" to the stimulus program. He says that and other "difficult but important steps" his administration has taken the past six months have helped "put the brakes on the recession."

"The recession looks to have largely bottomed in the spring," said Joel Naroff, president of Naroff Economic Advisors. "Businesses have made most of the adjustments they needed to make, and that will set up the economy to resume growing in the summer," he predicted.

In a separate report Friday, the Labor Department said employment costs rose 1.8% the 12 months ending in June, smallest annual gain on records that go back to 1982. The department said for the April-June quarter, its Employment Cost Index rose just 0.4%, slightly above the 0.3% rise in the first quarter, which had been the smallest quarterly gain on record.

The economy has now contracted for a record four quarters, underscoring the grim toll of the recession on consumers and companies.

Less drastic spending cuts by businesses, a resumption of spending by federal and local governments and an improved trade picture were key forces behind the better second-quarter performance. Consumers, though, pulled back a bit. Rising unemployment, shrunken nest eggs and lower home values have weighed on their spending.

An important area where businesses ended up cutting more deeply in the spring was inventories. They slashed spending at a record pace of $141.1 billion. There was a silver lining to that, though: With inventories at rock-bottom, businesses may need to ramp up production to satisfy improving customer demand. That would give a boost to the economy in the current quarter.

Federal Reserve Chairman Ben Bernanke has said he believes the recession will end later this year. And many analysts predict the economy will start to grow again — perhaps at around a 1.5% pace — in the July-to-September quarter. That would be anemic growth by historical measures, but it would signal the downturn has ended.

President Obama's stimulus package of tax cuts and increased government spending provided some support to second-quarter economic activity. But it will have more impact through the second half this year and will carry a bigger punch in 2010, economists say.

Even if the recession ends later this year, the job market will remain weak. Companies are expected to keep cutting payroll the rest of this year, but analysts say monthly job losses likely will continue to shrink.

Still, unemployment — now at a 26-year high of 9.5% — will keep rising. The Fed says it will top 10% at the end of this year. Businesses will be unlikely to boost hiring until they're certain the recovery has staying power.

In the second quarter, businesses continued to cut all kinds of spending, but not nearly as much as they had been, one of the reasons the economy didn't contract as much.

For instance, they trimmed spending on equipment and software at a 9% pace in the second quarter, compared with an annualized drop of 36.4% in the first quarter. Similarly, they cut spending on plants, office buildings and other commercial construction at a rate of 8.9%, an improvement from the annualized drop of 43.6% in the first quarter.

Housing — which led the country into recession — continued to be a drag on the economy. Builders cut spending at a rate of 29.3%, also an improvement from the 38.2% annualized drop reported in the first quarter.

Consumers, meanwhile, did a slight retreat in the spring.

They sliced spending at a rate of 1.2% in the second quarter, after nudging up purchases at a 0.6% pace in the first quarter. It turns out that consumers didn't nearly have the appetite to spend in the first quarter as the government previously thought, according to revisions released Friday.

With consumers spending less on everything from cars to clothes, Americans' savings rate rose sharply — to 5.2% in the second quarter, the highest since 1998.

A return to spending by governments helped economic activity in the spring. The federal government boosted spending at pace of 10.9%, the most since the third quarter of 2008. And state and local governments increased spending at a pace of 2.4%, the most since the second quarter of 2007.

An improved trade picture also added to economic activity in the spring. Although exports fell, imports fell more, narrowing the trade gap. That added 1.38 percentage points to second-quarter GDP.

The convergence of a collapse in the housing market, a near shutdown of credit and a financial crisis created what Bernanke and others have called a perfect storm for the economy. Those negative forces — the scale of which hasn't been seen since the 1930s — plunged the country into a recession in December 2007. It is the longest since World War II.

Bernanke and his Fed colleagues warned earlier this month that it could take five or six years for the economy and the labor market to return to long-term health. Recoveries after financial crises tend to be especially slow.

The economy's still-fragile state makes it vulnerable to any further shocks, Fed officials say. Given that, Fed policymakers are expected to keep a key bank lending rate — which influences rates on many consumer loans — at a record low near zero at its meeting in August and probably through the rest of this year, analysts say.