U.S. Economy Contracted 1%, Less Than Anticipated (Update2)

By Timothy R. Homan
Aug. 27 (Bloomberg) -- The U.S. economy contracted less than anticipated in the second quarter as a jump in government spending and smaller cutbacks by consumers helped mitigate a record plunge in inventories.
Gross domestic product shrank at a 1 percent annual rate from April to June, the same as calculated last month, a Commerce Department report showed today in Washington. Analysts in a Bloomberg survey forecast a 1.5 percent drop. Corporate profits rose the most in four years, the department also said.
Companies from Wal-Mart Stores Inc. to Macy’s Inc. cut costs and stockpiles to bolster earnings as job losses caused consumers to curb spending. Leaner stocks and government programs to revive demand, including the "cash for clunkers"
and first-time homebuyer incentives, are boosting manufacturing and housing, putting the economy on a path to recovery.
The stimulus "should reinforce growth going into next year," said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. The gain in profits "sets the stage for a broader recovery," he also said.
A separate report today showed that fewer Americans filed claims for unemployment benefits last week, reinforcing evidence that the labor-market rout is easing. Initial jobless claims dropped to 570,000 from 580,000 the previous week, the Labor Department said in Washington.

Stocks, Treasuries

Stock-index futures headed higher after the reports, while Treasuries hit their lows of the day. Contracts on the Standard & Poor’s 500 Index were up 0.1 percent at 1,027.80 at 9:05 a.m.
in New York. Benchmark 10-year note yields were at 3.48 percent, from 3.44 percent late yesterday.
Corporate profits, not included in the advance estimate released in July, rose 5.7 percent from the first three months of the year, the biggest increase since the first three months of 2005.
Depending on the pace of the recovery in the second half of the year, the Federal Reserve may not need to purchase all of the $1.25 trillion of mortgage-backed securities it previously targeted, Richmond Fed President Jeffrey Lacker said today.
Lacker in January had dissented against the central bank’s commitment to keep buying agency debt and mortgage securities.
The economy was forecast to shrink at a 1.5 percent pace, according to the median estimate of 75 economists surveyed by Bloomberg News. Estimates ranged from declines of 1.8 percent to
0.8 percent.

Worst Recession

The drop 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. The decrease subtracted 0.7 percentage point from GDP. 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.

‘Clunkers’ Program

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.
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 will contribute to a rebound in output.
Inventories dropped at a $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.
"We are expecting inventories to be the biggest swing factor bringing us into positive growth," Julia Coronado, a senior U.S. economist at BNP Paribas in New York, said before the report.

Target’s Cuts

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.
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.
Removing the drop in inventories, the economy grew at a 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 exiting homes in July reached a 5.67 million annual pace, the highest level since November 2007, the month before the recession began.

More Orders

Business investment may also be on the mend. Today’s report showed purchases of equipment and software dropped at an 8.4 percent pace last quarter.
Commerce Department figures yesterday showed orders for goods meant to last several years jumped in July by the most in two years. The report also indicated a measure of shipments used in calculating GDP climbed for a second month.
Trade was one of the bright spots last quarter, contributing 1.6 percentage point to growth and helping prevent a steeper contraction. The gap between exports and imports narrowed to $331.8 billion at an annual pace.
The economy will expand 2 percent or more in four straight quarters through June, the first such streak in more than four years, according to the median estimate of 53 forecasts in a Bloomberg News survey earlier this month. Economists at Morgan Stanley were among those lifting growth estimates for this quarter after yesterday’s report on durable goods.