U.S. GDP falls 1 percent in second quarter as recession eases

Today's GDP figures for the second quarter provide more evidence that the recession is easing.

U.S. GDP fell 1.0 percent from April to June, matching the initial second quarter estimate, the U.S. Commerce Department announced Thursday.

A Bloomberg News survey had expected second quarter GDP (revised) to decline 1.5 percent. The economy contracted an alarming 6.4 percent in Q1. In 2008, the world's largest economy grew a scant 1.1 percent, well below capacity.
Businesses continue to trim inventories

Economists say the 1.0 percent contraction in the second quarter stemmed primarily from reduced business inventories. And while that may appear to be a bad thing, in the long-term it's not, as it will set the stage for production increases, assuming typical, rising demand ensues in the quarters ahead.

Even so, U.S. GDP has declined for four consecutive quarters -- its longest negative GDP streak since the Great Depression of the 1930s. What's more, real GDP is down 3.9 percent in the past 12 months.

In the second quarter, continued business downsizing enhanced the bottom lines of corporations, the Commerce Department said. Before-tax profits increased 5.7 percent to $1.25 trillion, following a 5.3 percent rise in Q1. However, profits are still down 10.9 percent compared to a year ago.

Domestic investment fell 24 percent -- a large amount, but one that also further confirms an recession bottom, because domestic investment plunged 50 percent in the first quarter. Consumer spending fell one percent, exports fell five percent, imports plummeted 15.1 percent, and government spending rose 6.4 percent.

Business investment subtracted 1.15 percentage points from GDP in the second quarter, while government spending added 1.27 percentage points to GDP, the Commerce Department said.

In addition, the 'frugal consumer' trend continued: the U.S. savings rate increased to five percent, buoyed by a 3.8 percent increase in disposable income.

Economic Analysis: The positive dimensions to the 1.0 percent GDP decline? 1) The revision was unchanged, or represented a smaller decline than was expected; and 2) inventories and production are being brought back in-line with demand, which sets the stage for future production increases. Add the impact of fiscal stimulus working its way into the economy, and one can reasonably imagine a recovery taking hold in third or fourth quarter.

Could the GDP data be flashing a false recovery signal, and thus support a bear market rally? It's possible, so it's best for investors to monitor other key economic data, particularly job creation.

In other words, while looking for stock bargains, investors should remain cautious: the U.S. job market must turn around to give the U.S. economy that major source of demand needed to increase both real incomes and corporate earnings, the foundation for economic health and enduring stock market gains.
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