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GDP drop of 1% gives hope that recession will end soon

The recession was worse than previously thought, a report says. Bad news? Maybe not. The economy shrank less than expected and businesses may have to ramp up production; a strong recovery may follow.

August 01, 2009|Don Lee

WASHINGTON — The worst recession since the Great Depression could be coming to an end shortly, with a fresh report raising hopes that a recovery may be stronger than previously projected.

The government said Friday that the American economy shrank in the second quarter at an annual pace of 1%. That was better than the 1.5% contraction in gross domestic product that was expected by economists, and it marked a dramatic improvement from a decline of about 6% in the prior six months. (GDP is the total value of goods and services produced.)

What's more, the Commerce Department statistics showed that the latest recession has been even more severe than previously thought. History has shown that deep recessions are often followed by robust recoveries.

Friday's data indicate, for example, that businesses cut back on inventories by a record amount in the second quarter, suggesting they may have to ramp up production to fill depleted warehouses and store shelves.

"It sets the stage for a stronger recovery," said Mark Zandi, chief economist at Moody's Economy.com. "The subsequent recovery will be modest," he added, "but better than I had thought before today's numbers."

Still, trouble spots remain, including rising joblessness.

Since the recession began in December 2007, the nation has lost about 6.5 million jobs, and the government is likely to report next week that employers eliminated hundreds of thousands of more positions in July.

The unemployment rate, 9.5% in June, also is expected to keep rising until at least the end of this year as companies hold off hiring until they are certain a recovery is real.

The government's report also pointed to danger signs in the commercial real estate market, which includes office buildings and retail stores. Statistics show that before the downturn the commercial construction boom was much bigger than previously thought.

That raises the specter of more defaults and foreclosures in this sector, as well as more trouble for the banks and other financial institutions that lent money.

Even so, the Obama administration and Democratic leaders in Congress heralded the latest economic data as an indication that the government's stimulus programs are working and that better days lie ahead.

Without the federal government's massive $787-billion stimulus plan, the economy would have shrunk by 4% in the second quarter, several analysts said.

"I am guardedly optimistic about the direction that our economy is going," Obama said Friday, although he noted that there's much more work to be done.

Some businesses already see the economy coming back, with sales increasing and more orders coming in, but that hasn't yet translated into hiring.

Steve Hasty, owner of a metal fabrication shop in Kansas City, Kan., started the year by laying off six of his 46 workers and then imposing a 10% pay cut on everybody else. At the time, Hasty promised he would make up their lost wages when the company turned a profit again.

"I think we'll be there [this] month," he said from his plant near the rail yards along the Missouri River. His new orders include work for a farm-equipment maker in Nebraska and New York City's subway system.

Yet Hasty has no plans to add workers or buy new equipment anytime soon. Like others, he worries about the possibility of a double-dip recession, and says he will continue to draw down his expenses and debts.

Midwestern states such as Kansas, Oklahoma and Nebraska weren't hit as hard by the recession, in large part because they benefited from relatively solid commodity prices and were not exposed to the bust in the real estate and financial services industry.

Financing isn't as big an issue in these parts, but bankers say businesses aren't eager to tap credit lines.

"There's plenty of capital available in the heartland," said Mariner Kemper, chairman of UMB Financial Corp., which operates banks in Missouri, Kansas and several other states.

"But the general climate is still somewhat soft. They're not spending as much," he said, noting that his customers in the second quarter used $30 of every $100 of credit made available to them, down from $33 a year ago.

Many companies are cautious because the future looks cloudy. Any favorable forecast will depend on consumers starting to spend again.

Friday's report showed that the personal savings rate, which had been negative in recent years, went up to 5.5% in the second quarter. That means consumers will be in better financial shape to spend -- although it's unclear how much they actually will, given their low confidence, declining wages and concerns about jobs.

Consumer spending, which accounts for about 70% of the economy, declined at an annual rate of 1.2% in the second quarter -- twice the drop that economists were expecting.

"This occurred in the face of gargantuan fiscal stimulus," said David Rosenberg, economist at investment firm Gluskin Sheff & Associates, noting that it raises questions about will would happen to the economy once Uncle Sam's money recedes.

The two-year stimulus package, which took effect in February, includes payments to retirees and local governments as well as spending on infrastructure projects.

That helped to boost the economy last quarter, and the "cash for clunkers" car-rebate program, which the House moved Friday to support with additional funds, is likely to further juice up spending and manufacturing.

Overall, however, many analysts were heartened by the report, and some raised their projections for economic growth Friday.

On Wall Street, confidence has been steadily building, with the Dow Jones index gaining 8.6% in July -- its best performance for the month in 20 years.

Zandi of Economy.com said he now expected the fourth quarter's GDP to increase at an annual rate of 2%, double his previous forecast.

With the 1% decline in the April-June period, GDP has fallen for four straight quarters, the longest downturn since the 1940s.

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don.lee@latimes.com

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