U.S. Economy: GDP Contracts 1% as Recovery Approaches (Update1)

The U.S. economy took a first step toward recovering from the worst recession since the 1930s in the second quarter as companies reduced inventories, spending started to climb and profits grew.

Gross domestic product shrank at a 1 percent annual rate from April to June, less than the 1.5 percent decline projected by economists in a Bloomberg News survey, a Commerce Department report showed today in Washington. Corporate earnings rose by the most in four years, the department also said.

Government programs, including the “cash-for-clunkers” and first-time homebuyer incentives, are boosting manufacturing and housing, indicating the gain in sales that began last quarter will be sustained in the second half of the year. Another report showed unemployment may jeopardize the strength of the economic rebound.

“We’re on a pretty decent recovery path,” said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York. “There was a better mix last quarter with almost every major component of final demand being revised up and inventories being revised down. That puts us in a pretty decent position going into the third quarter.”

Stocks rose, propelled by a late rally in commodities. The Standard & Poor’s 500 Index rose 0.3 percent to close at 1,030.98. Treasury securities fell as stocks climbed, pushing up the yield on the benchmark 10-year note to 3.46 percent at 5:12 p.m. in New York from 3.44 percent late yesterday.

Profits Improve

Corporate profits, not included in the advance GDP estimate released in July, rose 5.7 percent from the first three months of the year, the biggest increase since the first quarter of 2005.

The median GDP forecast was based on a Bloomberg survey of 75 economists. Estimates ranged from declines of 1.8 percent to 0.8 percent. Today’s reading matched the government’s initial calculation issued last month and followed a 6.4 percent pace of contraction in the first three months of the year.

A separate report today showed 570,000 workers filed claims for unemployment benefits last week, down from 580,000 the previous week, the Labor Department said in Washington. While off the peak of 674,000 applications reached in the end of March, the figures compare with an average of 350,000 applications filed during the expansion that ended in December 2007.

Worst Recession

The drop in GDP was the fourth in a row, the longest contraction since quarterly records began in 1947. The world’s largest economy has shrunk 3.9 percent since last year’s second quarter, making this the deepest recession since the Great Depression.

Today’s report is the second of three estimates on second- quarter growth. The figures will be revised again in September as more information becomes available.

Consumer spending, which accounts for about 70 percent of the economy, fell at a 1 percent pace, less than anticipated, following a 0.6 percent increase in the prior quarter. Purchases were forecast to drop 1.3 percent, according to the survey median.

Spending is likely to increase this quarter. Industry data showed sales of cars and light trucks rose to an 11.2 million annual unit rate in July, the highest since September.

The “cash-for-clunkers” program, which offered buyers discounts of as much as $4,500 to trade in older cars and trucks for new, more fuel-efficient vehicles, produced almost 700,000 automobile sales before ending on Aug. 24, the Transportation Department said yesterday.

Production Gains

General Motors Co. and Chrysler Group LLC, both out of bankruptcy, are among firms set to ramp up production as government efforts lift demand.

Smaller stockpiles at companies from Wal-Mart Stores Inc. to Macy’s Inc. will contribute to a rebound in output as orders rise to stock bare shelves. Inventories dropped at a record $159.2 billion annual rate last quarter, subtracting 1.4 percentage points from growth. They dropped at a $113.9 billion pace in the first three months of the year.

Target Corp., the second-largest U.S. discount retailer, is among companies trimming costs to make up for slower sales. The Minneapolis-based company reported second-quarter profit that fell less than analysts estimated as the company avoided markdowns.

“We continue to conservatively manage our inventories to help us navigate the challenging sales environment,” Kathryn Tesija, Target’s vice president for merchandising, said in an Aug. 18 conference call.

Sales Increased

A gauge of sales that excludes inventories showed the economy grew at a 0.4 percent rate last quarter, the best performance in a year. Reports so far this month have shown government efforts to thaw credit markets and boost housing may be taking hold.

Combined sales of new and existing homes in July reached a 5.67 million annual pace, the highest level since November 2007, the month before the recession began.

A bigger jump in government spending than previously estimated helped offset the drag on growth from the slump in stockpiles. Federal, state and local expenditures climbed at a 6.4 percent annual pace, the most in more than seven years.

JPMorgan’s Kasman cautioned that unemployment claims will need to decline further to confirm his forecast that the labor market will soon improve. He acknowledged that U.S. consumers were likely to lag behind their global counterparts because of the need to repair tattered finances.

“This recovery has a lot going for it, but one thing it does not have going for it is an anticipation of a normalization for consumers,” Kasman said. “The economy will do better, but we aren’t going to have a full-bodied, strong recovery coming out of what has been a very damaging, deep recession.”

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net