Credit Commentary

Fall in US GDP less than predicted

By Zarana on Thursday, August 27 2009

The U.S. economy shrank less than expected in the second quarter as smaller declines in consumer spending and exports offset record inventory cutbacks, while corporate profits rose by the most in four years.

The Commerce Department said gross domestic product, which measures total goods and services output within U.S. borders, fell at a 1% annual rate, unchanged from last month's estimate. Analysts had forecast output shrinking at a 1.5% pace in the second quarter after collapsing 6.4% in the January-March quarter.

With the second quarter contraction, real GDP has declined for four straight quarters for the first time since the government started keeping records in 1947. The Commerce Department's preliminary report also showed corporate profits after taxes rose 2.9% in the second quarter, likely a function of cost cutting measures by companies, after increasing 1.3%  in the first three months of the year.

Current dollar GDP

Current-dollar GDP, the market value of the nation's output of goods and services, decreased 1.0%, or $34.7 billion, in the second quarter to a level of $14,143.3 billion. In the first quarter, current-dollar GDP decreased 4.6%, or $169.3 billion.

Inventories cut

Businesses were more aggressive in reducing inventories in the second quarter than previously thought. Business inventories dropped a record $159.2 billion instead of the $141.1 billion estimated last month, lopping 1.39 percentage points from the overall GDP figure.

Inventories fell by $113.9 billion in the first quarter. Excluding inventories, GDP rose 0.4%, the department said. But when inventories were scrubbed from the total economic output figures, GDP actually showed a rise of 0.4%, the first gain since the second quarter of 2008.

Consumer Spending Rose

While, the blow from the sharp decline in inventories was softened by a smaller-than-initially estimated drop in consumer spending. Consumer spending, which accounts for about 70% of U.S. economic activity, fell 1.0% in the second quarter rather than the 1.2% rate earlier estimated by the department.

Also helping to minimize the decline in overall real GDP was the drop in exports which was not as steep as previously thought. Exports fell 5% rather than the 7% drop reported last month. Exports tumbled 29.9% in the first quarter.

Government programs, including the “cash-for-clunkers” and first-time homebuyer incentives, are boosting manufacturing and housing, indicating the gain in sales that began last quarter will be sustained in the second half of the year.