Finance news

The worst U.S. economic slump since the Great Depression abated in the second quarter as government spending programs started to kick in, while the sharpest pullback by consumers since 1980 augured a muted recovery.

Gross domestic product shrank at a better-than-forecast 1 percent annual pace after a 6.4 percent drop the prior three months, Commerce Department figures showed yesterday in Washington. A survey of purchasing managers showed separately that business contracted less than estimated in July.

Stabilization in homebuilding and the liquidation of unsold goods set the stage for gains in GDP starting this quarter, analysts said. At the same time, rising unemployment and weakening income growth threaten to erode household finances; the International Monetary Fund yesterday said policy makers must be ready to employ further stimulus if needed.

“I don’t think there is a lot of forward momentum,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, and former chief economist for the U.S. Senate Banking Committee. “Consumers are looking at weak job growth and weak income growth and the combination dictates subpar consumer spending over a period of years.”

Stocks and Treasuries gained after the report yesterday. The Standard & Poor’s 500 Stock Index climbed 0.1 percent to close at 987.48. The Dow Jones Industrial Average had its best month since 2002 in July. Benchmark 10-year note yields fell to 3.48 percent late yesterday from 3.61 percent the prior day.

Economists’ Forecasts

The economy was forecast to shrink at a 1.5 percent pace, according to the median estimate of 78 economists surveyed by Bloomberg News.

Government spending rose at a 5.6 percent pace last quarter, the most since 2003, as President Barack Obama’s $787 billion stimulus program began to take effect. The funds are aimed at helping states retain workers, financing infrastructure projects and reducing tax payments.

Profits reported for the second quarter by companies from Caterpillar Inc. to Dow Chemical Co. have reinforced signs the slump is coming to an end. The Commerce Department’s figures yesterday, which included benchmark revisions to past years, showed that GDP has tumbled 3.9 percent since the second quarter of last year — the biggest drop since quarterly records began in 1947. GDP has fallen four straight quarters, the longest stretch ever.

Worst Since 1980

Consumer spending, which accounts for about 70 percent of the economy, fell at a 1.2 percent pace following a 0.6 percent increase in the prior quarter. It was forecast to drop 0.5 percent, according to the survey median. Purchases slid 2 percent since the peak at the end of 2007 — the most since a 2.4 percent decline in the 1980 recession.

“It’s important to put it in perspective,” Christina Romer, who chairs the White House Council of Economic Advisers, said in a Bloomberg Television interview. “We are seeing some sign the consumer is stabilizing and, of course, the tax cut that was included in the recovery act I think is going to help consumers feel more confident.”

The IMF, in an annual review of the U.S. economic outlook, yesterday said it anticipates a “gradual” recovery.

“If downside risks materialize, additional credit easing and a strengthened commitment to maintaining a highly accommodative monetary stance could be considered,” the IMF’s board said in a statement cheap cash advance.

Job Losses

GDP contracted a revised 1.9 percent in the fourth quarter of 2008 from the same time the prior year, compared with the 0.8 percent drop previously on the books.

The GDP report is the first for the quarter and will be revised in August and September as more information becomes available.

The economy has lost 6.5 million jobs since the recession began in December 2007, and economists surveyed by Bloomberg last month forecast the jobless rate will exceed 10 percent by early 2010.

“The United States economy has found bottom but will be slow in recovering as unemployment continues to be a drag on consumer spending,” Andrew Liveris, chief executive officer of Midland, Michigan-based Dow, said in a statement on July 30.

Second-quarter profit at Dow and at Peoria, Illinois-based Caterpillar topped analysts’ estimates. Caterpillar, the world’s largest maker of construction equipment, said last week that stimulus programs in countries such as China were helping stabilize sales.

Trade Deficit

The trade gap shrank last quarter, preventing a steeper decline. The gap between exports and imports fell to $339.3 billion at an annual pace from $386.5 billion.

Inventories dropped at a record $141.1 billion annual pace, after a $113.9 billion decline.

Leaner stockpiles set the stage for recovery in production.

“With inventory levels in an ultra-lean state, businesses should start adding inventories in the second half of the year as the economy begins to show signs of life,” said Ellen Zentner, senior economist at Bank of Tokyo-Mitsubishi UFJ Ltd.

Reflecting that outlook, the Institute for Supply Management-Chicago Inc. yesterday said its business barometer increased to 43.4, the highest level since September, from 39.9 in June. Readings below 50 signal a contraction.

Auto Rebound

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

The Obama administration’s so-called cash-for-clunkers trade-in program begun in July spurred sales, exhausting most of the $1 billion set aside for it in less than a week. The House of Representatives yesterday approved an emergency measure to allocate another $2 billion to the plan. The program provides as much as $4,500 toward the purchase of a new car when an older, less fuel-efficient, vehicle is turned in.

The GDP report showed the slump in business investment slowed last quarter, while residential construction kept plummeting.

Recent reports showed the housing slump, which helped trigger the financial crisis, and the decline in manufacturing have eased. Housing starts rose in June and industrial production shrank at the slowest pace in eight months, according to government reports last month.

The Federal Reserve’s preferred inflation gauge rose at a 2 percent annual pace last quarter, less than forecast. The measure, which is tied to consumer spending and strips out food and energy costs, rose at a 1.1 percent annual pace the prior quarter.

Economists project the economy will grow at an average 1.5 percent pace from July to December, according to a Bloomberg survey taken in early July.

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