Credit Commentary

US Economy declines further, but at a slower pace

By Administrator on Wednesday, August 05 2009

The first, or advance, estimate of second-quarter GDP indicated that the U.S. economy continued to contract, although by a smaller-than-expected 1 percent at an annual rate compared to expectations of a 1.5 percent drop.

However, the decline followed a downwardly revised 6.4 percent plunge in the first quarter (originally reported as -5.5 percent) and marked the fourth consecutive decline in GDP.

Signs of a recovering economy

U.S. gross domestic product, a broad measure of the value of goods and services produced, contracted at a 1% annual rate last quarter, its slowest pace in a year. That was a significant improvement from the first quarter contraction of 6.4% and the fourth quarter, 2008 5.4% pullback

One of the big reasons of the second-quarter drop in GDP was due to a sharp decline in business inventories. With their shelves becoming bare, businesses may be in a position to speed up production to restock.

Contributing to this encouraging GDP report is the slight upturn in construction spending, the stabilizing housing market, and slowing rate of decline in both business investment and the manufacturing sector. Government spending also increased up last quarter, which moderated the downturn.

What is holding back the economy improvement?

Despite increases in income, consumer spending remains weak. Consumer spending accounts for 70% of our economy, so without healthy spending by consumers, an economic recovery is less certain.

However the consumers have reason to be cautious with their money. Unemployment remains high, with 9.5 % of the labor force out of work in June, the highest level in 26 years. The July unemployment rate is expected to be even worse. Unemployment tends to lag behind other economic indicators, such as business investment and manufacturing, when the economy is recovering from a recession.

In addition, though consumer spending stabilized early this year the businesses kept cutting back sharply on payrolls, inventories and new-equipment spending.