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Saturday, 1 August 2009

End of recession seen as US economy contracts 1.0%

WASHINGTON (AFP) - - The US economy showed signs of emerging from a long and brutal recession, according to data Friday showing a narrower-than-expected 1.0 percent decline in output in the second quarter.

The Commerce Department estimate on gross domestic product (GDP) was stronger than expected by private forecasters who had called on average for a 1.5 percent annualized pace of contraction in the April-June quarter.

The report showed an easing of the horrific slump and lent credence to predictions that the world's biggest economy was close to emerging from a recession that began in December 2007.

"The small contraction in the economy in the second quarter is another indication that the recession will soon end," said Augustine Faucher, economist at Moody's Economy.com. "Conditions are set for a rebound in the current quarter."

Scott Brown, chief economist at Raymond James & Associates, said the report showed "signs of stabilization in a lot of areas of the economy, so the worst is definitely behind us."

Brown added: "We are close to a bottom in the overall economy but the recovery will be weak with continuing problems in the labor market."

The agency's revisions showed a 6.4 percent decline in the first quarter, worse than the previous estimate of a 5.5 percent drop.

In the fourth quarter of 2008, the drop was revised to 5.4 percent instead of 6.3 percent.

Other revisions from 2008 showed a weaker GDP than originally estimated, with growth of 0.4 percent for the full year instead of 1.1 percent.

President Barack Obama's spokesman Robert Gibbs said the GDP figures "show that we are making progress," in righting the economy.

"We all recognize that there is a lot of work to do, particularly to get people back to work," he said. "I think it's very likely that when we meet here a week from today and talk about unemployment numbers, we'll see hundreds of thousands of more jobs lost."

Many private and government economists see a return to growth in the second half of the year, although some warn that rising unemployment could dampen any recovery.

The jobless rate hit a 26-year high of 9.5 percent in June amid more retrenchment by employers. Some expect the jobless rate to rise to 10 percent or higher.

Many segments of the economy remained extremely weak, the GDP data showed. Private investment was down 20.4 percent, but that was better than a 50 percent plunge in the first quarter.

Consumer spending, the main driver of economic activity, fell 1.2 percent after a rise of 0.6 percent in the first quarter.

Bart Van Ark, chief economist at the Conference Board, said the report offers no hope for a quick "V-shaped" recovery.

Van Ark said the GDP data "confirms that the path to recovery remains a long haul, with more disappointments likely in the months to come."

"Consumer spending came out worse than expected and is likely to remain weak into the third quarter because of ongoing clogging in income and credit channels," he added.

"The very rapid decline in inventories raises hopes for a recovery in industrial production, but also increases chances of a pushback later in the year as domestic and global markets remain weak. With capital spending still falling and unemployment rising, neither investors nor workers are likely to see strong rewards anytime soon."

The report showed positive contributions came from government spending, increased auto production and trade.

Real final sales of domestic product -- a key figure that strips out inventory adjustments -- showed a 0.2 percent drop in the second quarter, compared with a decrease of 4.1 percent in the first.

Federal government expenditures and investment increased 10.9 percent in the second quarter, in contrast to a decrease of 4.3 percent in the first. That included defense expenditures up 13.1 percent.

The positive contribution to GDP from trade came despite a drop in exports linked to weakness in the global economy. Exports of goods and services decreased 7.0 percent in the second quarter while imports fell 15.1 percent. Because that meant more production was brought home, this was a positive factor for GDP.

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