US economy shrank less than expected in the first quarter


An employee on duty at the Baldor Electric factory in St. Louis.  The government reading on US  gross domestic product released Friday was better than economists expected. AP

The economy’s long, churning decline leveled off significantly in the second quarter, as stock markets started to recover, corporate profits bounced back, housing markets stabilized and the rampant pace of job losses tapered off. Declines in business investment leveled off, and the economy was aided by big increases in government spending at the federal, state and local levels.

“We’re in a deep hole, and now we’ve got to dig ourselves out of it, which is a very difficult task,” Diane Swonk, chief economist at Mesirow Financial, said. But consumer spending fell by 1.2 per cent as Americans put more than 5 per cent of their disposable income into savings. Economists are concerned that consumer spending, which makes up 70 per cent of the economy, will not rebound as long as employers keep cutting jobs and trimming wages. Friday’s report on gross domestic product — a broad gauge of the country’s output — is the government’s rough draft at measuring the economy, and can be revised sharply up or down. The Commerce Department revised its earlier assessments of the country’s woes, saying that the economy contracted at a pace of 6.4 percent in the first three months of the year, compared with an earlier figure of 5.5 per cent.

Depleted inventories

Economists had been expecting the second-quarter economy to contract at a pace of 1.5 percent. Now, even with jobs still vanishing and wages flat, many forecasters expect the economy to touch bottom sometime in the next few months. Economists say that businesses from small manufacturers to big automakers are poised to rebuild their depleted inventories, which fell by an annualized $141 billion in the second quarter. That restocking could spur economic growth later this year.

“We’re going from recession to recovery, but at least early on, it’s not going to feel like one,” said the chief economist at Moody’s Economy.com, Mark Zandi. “For economists, this is a seminal part in the business cycle, but for most Americans, it won’t mean much.”

That is because the job market is expected to remain dismal even after the economy resumes growing. As business picks up after a recession and companies start receiving more orders and restocking their shelves, employers will still resist hiring new full-time workers, and instead pay overtime or rely on part-time employees.

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