GDP Better Than Expected, Economy on The Mend

Washington, DC, July 31, 2009--The U.S. economy showed more signs of recovery as the second quarter measure of Gross Domestic Product indicated the economy contracted at a pace of just 1 percent.

It was also a better-than-expected number that provided the strongest signal yet that the recession is finally winding down.

The dip in gross domestic product for the quarter, reported by the Commerce Department on Friday, comes after the economy was in a free fall, falling at an annual rate of 6.4 percent in the first three months of this year. That was the sharpest contraction in nearly three decades.

The economy has now contracted for a record four straight quarters for the first time on records dating to 1947. That underscores the grim toll of the recession on consumers and companies.

Many economists were predicting a slightly bigger 1.5 percent annualized contraction in second-quarter GDP.

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 performance. Consumers, though, pulled back a bit. Rising unemployment, shrunken savings and lower home values have weighed down their spending.

A key area where businesses ended up cutting more deeply in the spring was inventories. They cut 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 customer demand. That would give a boost to the economy in the current quarter.

The Commerce Department also reported Friday that the recession inflicted even more damage on the economy last year than the government had previously thought. In revisions that date back to the Great Depression, it now estimates that the economy grew just 0.4 percent in 2008. That's much weaker than the 1.1 percent growth the government had earlier calculated.

Also Friday, the government reported that employment compensation for U.S. workers has grown over the past 12 months by the lowest amount on record, reflecting the severe recession that has gripped the country.