TOPICS > Economy

GDP Reading May Signal Stability for Economy

BY Anna Shoup  August 27, 2009 at 12:30 PM EDT

A woman shops at a mall; Spencer Platt/Getty Images

The less than expected drop could signal good news — or at least not all negative news — for the economy going into the third quarter. The latest economic reading was in line with a late July estimate by the U.S. Bureau of Economic Analysis.

GDP, which measures the national output of a good and services, provides a broad measure of the country’s economic performance and is an important indicator of whether the U.S. is still suffering a recession.

Heading into the third quarter that began on July 1, a rise in GDP could suggest that the recession — traditionally defined by economists as two consecutive quarters of a decrease in GDP — is coming to an end. The second-quarter decline was less than the 1.5 percent contraction that economists anticipated.

“The stronger than expected reading will likely add more confirmation that the bottom is found,” said Standard & Poor’s economist Beth Ann Bovino, as quoted by BusinessWeek.com

The latest’s GDP reading is a big improvement from the 6.4 percent decrease in this year’s first quarter and 5.4 percent decrease in the fourth quarter of 2008. The improvement, according to the BEA, came from several factors, including increases in government spending at the federal, state and local levels and smaller decreases in nonresidential fixed investment and exports. There was also a smaller decrease in exports and a smaller drop in consumer spending.

Business inventories dropped in the second quarter, which brought GDP growth down but consumer spending, which makes up for about 70 percent of economic activity, fell less than expected. Exports also fell less than expected.

GDP is largely a measure of consumer spending, imports, exports, residential fixed investments, and government spending.

“Consumer spending didn’t fall quite as much as the prior estimate, so that means programs like Cash for Clunkers and the [$8,000] tax credit for first-time homebuyers may result in higher demand than previously thought in the coming quarters,” said Mark Vitner, economist at Wachovia, as quoted by CNNMoney.com.

This marks the fourth consecutive quarter of contraction, the longest run since 1947 when the Commerce Department began tracking GDP.

A separate report released Thursday showed that workers filing initial claims for jobless benefits fell last week to 570,000. The number of people receiving long-term unemployment benefits also fell from 6.25 million to 6.13 million – the lowest figure since April.

The pace of layoffs has slowed slightly, though the job market is not expected to pick up considerably, and weak consumer spending may hamper a strong economic recovery.