GDP better than expected; jobless claims drop

WASHINGTON -- The economy shrank at an annual rate of 1% in the spring, a better-than-expected showing and more evidence that the recession is drawing to a close.

Many analysts believe the economy is growing in the current quarter, but they caution that any rebound will not be accompanied initially by rising employment. Jobless claims figures released Thursday show a drop in claims but remain well above levels associated with a healthy economy.

The Commerce Department's latest estimate for second-quarter gross domestic product — total output of the nation's economy — was unchanged from the first estimate released last month. The 1% drop at an annual rate, while representing a record fourth consecutive decline, was far smaller than the previous two quarters. It also was better than the 1.5% decline economists expected.

The report Thursday found that businesses slashed their inventories more than first reported and cut back more sharply on investment in new plants and equipment. But those reductions were offset by revisions elsewhere.

The government said consumer spending, which accounts for about 70% of economic activity, fell at an annual rate of 1% in second quarter, a slight improvement from the 1.2% decline reported last month. Residential construction and exports also were revised to show smaller declines.

The 1% overall rate of decline in the April-June quarter followed decreases of 6.4% in the first quarter and 5.4% in the final three months of 2008, sharpest back-to-back declines in a half-century. The four straight quarterly declines in GDP mark the first time that has occurred on government records that date to 1947.

The recession that began in December 2007 is the longest since World War II, and the deepest in terms of the drop in the GDP, which is down 3.9% from its previous peak.

But economists are heartened that the decline slowed to a 1% rate in the spring. Many analysts believe the government's $787 billion economic stimulus plan and the cash for clunkers program to boost car sales will lift GDP growth to around 2% in the current July-September quarter.

But the return to economic growth won't mean more jobs at first. Economists expect the unemployment rate, currently 9.4%, to keep rising through the spring of next year.

The Labor Department said Thursday that first-time claims for unemployment benefits fell to a seasonally adjusted 570,000, from an upwardly revised 580,000 the previous week. The number of people continuing to claim benefits dropped to 6.13 million from 6.25 million, lowest since early April.

The weekly figures remain far above the 325,000 or so that analysts say is consistent with a healthy economy. New claims last fell below 300,000 in early 2007.

White House economic adviser Christina Romer said Tuesday that the unemployment rate is likely to hit 10% this year. That could dampen consumer spending and weaken any recovery.

The government makes three estimates of the economy's performance for any given quarter. Each new GDP estimate is based on more complete information.