THE COMMERCE DEPARTMENT’S latest reading of gross domestic product in the April-June quarter represented a big downward revision to the government’s estimate one month ago that the economy grew at a 0.7 percent rate. But the data were slightly better than economists’ forecasts of no growth in the quarter.
GDP is the country’s total output of goods and services and is considered the broadest measure of the economy’s health.
Though the economy was clearly ailing in the second quarter, some economists took comfort that it didn’t slip into negative territory as some had feared. “Psychologically, I think this is a good thing — the fact that the economy did keep its head above water,” said Ken Mayland of ClearView Economics.
The new, lower estimate largely reflected businesses were doing a better job of working off excess inventories of unsold goods than previously estimated. While this process subtracts from GDP, economists say excess inventories must be whittled before companies can ramp up production, something that would bode well for economic growth down the road.
While second-quarter growth remained positive, the rate of expansion was the weakest since a 0.1 percent rate of decline in the first quarter of 1993 as the country was struggling to emerge from the last recession.
The new GDP figure underscores how dramatically the economy continued to weaken into the spring and marked the poorest showing in the country’s yearlong economic slowdown. In the first three months of this year, the economy grew at a rate of 1.3 percent.
The Bush administration and many private economists predict the second quarter will prove to be the point of maximum danger for the economy. The administration is counting on nearly $40 billion of tax rebate checks and the aggressive credit easing by the Federal Reserve to lift the economy to higher growth rates in the second half of this year.
To fight off a possible downturn, the Fed has slashed interest rates seven times this year, totaling 3 percentage points. The most recent cut, one-quarter point, came last week.
Some economists were worried that the revised GDP estimate for the second quarter would show that the economy either stalled or slipped into reverse, possibly signaling the start of the first recession in the United States in 11 years. A recession is usually defined as two consecutive quarters of shrinking GDP.
However, many economists predict that the economy will rebound to around a 2 percent growth rate in the current quarter and to 3.5 percent in the fourth quarter reasons for the lower estimate of second-quarter GDP is that companies liquidated their inventories more than the government previously thought. Inventory reduction was valued at $38.4 billion in the second quarter, the biggest decline since the first quarter of 1983. That subtracted 0.4 percentage point from GDP.
Another reason for the downward revision was that the trade deficit was slightly worse because exports fell more than previously thought, reducing second quarter GDP by 0.3 percent percentage point.
Still, much of the overall weakness in the second quarter continued to come from companies cutting back sharply in their investment in plants and equipment, which had been a main source of strength driving the record expansion.
Battered by weak sales and plunging profits, U.S. companies reduced such investment in the second quarter at a rate of 14.6 percent, the worst showing since the second quarter of 1980. The new estimate was weaker than the 13.6 percent rate of decline previously estimated.