Recession or not? US economy likely to be in limbo

In the October 25, 2009 article "Recession or not? US economy likely to be in limbo," Rob Lever reports:

WASHINGTON (AFP) – The US economy is poised to show growth in the third quarter, rebounding from its worst slump in decades, but whether the recession is over is a more complex question.

The first official estimate due Thursday on gross domestic product (GDP), or output of goods and services, is expected to show expansion of between 3.0 and 4.0 percent in the July-September period after four negative quarters in a row.

Yet the economy may linger for months in a "no-man's land" in which GDP is expanding but no one is sure if the recession is "officially" ended, because of the way business cycles are defined in the United States.

For decades, the US government and economic community have recognized a panel of academicians with the private National Bureau of Economic Research as the official arbiter of business cycles.

The NBER panel does not use the definition employed in many countries of recession as two consecutive quarters of declining GDP.

NBER says a recession is "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

Moreover, the NBER generally waits months before its pronouncement, leaving the question of recession or not in limbo.

Complicating the issue is the sharp rise in unemployment, which has hit a 26-year high of 9.8 percent, making it still feel like recession for many.

"The average American doesn't think you have recovery until the unemployment rate comes down, and it won't come down until you have a sustained rate of 3.0 percent," says Cary Leahey, senior economist at Decision Economics, a research firm.

"This is not really a meaningful recovery."

Leahey expects the economy to show growth of roughly 3.9 percent in the third quarter, but sees a slowdown to around 2.0 percent in the fourth quarter as the expansion stalls.

Moreover, analysts point out that much of the growth will be the result of businesses rebuilding inventories following sharp production cuts, and from government stimulus efforts that may not be sustained.

Nariman Behravesh, chief economist at the research and consulting firm IHS Global Insight, said he believes the recession ended in June or July and that NBER should provide at least a preliminary pronouncement of the fact.

"I'm sure the recession is over, the only question is the strength of the recovery," he said.

"NBER could provide a preliminary reading, they could say, 'This is our best estimate,' instead of leaving everybody guessing."

Behravesh said it may be as long as a year before NBER decides and that the state of uncertainty "is not helpful for businesses."

Federal Reserve chairman Ben Bernanke said last month the recession is likely over "from a technical perspective" but that the economy will struggle due to difficult credit conditions and high unemployment.

"It's still going to feel like a very weak economy for some time as many people will still find that their job security and their employment status is not what they wish it was," the Fed chief said.

The NBER declared the current recession on December 1, 2008, a full year after the downturn began. That was made despite data showing modest growth in the fourth quarter of 2007 and second quarter of 2008.

NBER declared an end to the 2001 recession only in July 2003, even though revised data showed there were not two consecutive negative quarters for GDP.

Roger Farmer, chairman of the economics department at the University of California at Los Angeles, said he believes NBER will eventually declare the recession ended in May 2009.

But Farmer said many Americans still will be feeling economic pain and that the NBER should consider other factors such as long-term unemployment.

"I think the economy is fragile, and the recovery could easily fizzle out," he said.

Even if the recession were declared over, "until the unemployment rate comes down, the US economy is going to be in trouble," he said.

"Only when we start spending again, and confidence returns to the private economy will the recession be over."

France's Sarkozy calls for 'revolution' in measuring economic growth to account for well-being

In the September 14, 2009 article "France's Sarkozy calls for 'revolution' in measuring economic growth to account for well-being," Associated Press writer Emma Vandore reports that the President of France has a new proposal for measuring economic well-being:

PARIS - French President Nicolas Sarkozy asked world leaders to join a "revolution" in the measurement of economic progress by dropping their obsession with gross domestic product to account for factors such as health-care availability and leisure time.

In a speech on the first anniversary of the collapse of Lehman Brothers, Sarkozy said the financial crisis has shown the need for a better way of calculating a country's economic health.

His own country, known for its leisurely meals, long vacations and labour protections, could outshine more profit-focused economies if nations act on new recommendations in a report headed by two Nobel economists commissioned 18 months ago.

The report, presented to Sarkozy on Monday, offers a raft of factors that governments should take into account when making policy, such as environmental sustainability. But it doesn't specifically suggest a new statistical index.

Despite the lack of detail Monday, Sarkozy said the French statistics office to change the way it measures progress. But any worldwide shift would require other nations to get on board, and some economists questioned whether rethinking GDP would work.

Sarkozy will nonetheless try to persuade other world leaders to sign up to the proposals at the G20 summit in Pittsburgh, Henri Guaino, a special advisor to Sarkozy, told The Associated Press.

"A great revolution is waiting for us," Sarkozy said. "For years, people said that finance was a formidable creator of wealth, only to discover one day that it accumulated so many risks that the world almost plunged into chaos."

"The crisis doesn't only make us free to imagine other models, another future, another world. It obliges us to do so," he said.

Their report recommends looking at household income, consumption and wealth rather than national production for a better reflection of material living standards. Non-market activities such as house-cleaning should also be tracked, it says.

More prominence should be given to the distribution of income and wealth, as well as to access to education and health.

Attention should also be given to whether countries are over-consuming their economic wealth and damaging the environment, the report says.

Governments' addiction to inflating the GDP of their economies has endangered the planet by encouraging risky behaviour and as overconsumption triggers environmental concerns, Sarkozy said.

U.S. economist Joseph Stiglitz, winner of the 2001 Nobel economics prize and a critic of free-market economists, co-authored the report.

"GDP is an attempt to measure one part of what is going on in our society which is market production. It is what I call GDP fetichism to think success in that part is success for the economy and for society," he said.

Advising Stiglitz was Armatya Sen of India, who won the 1998 Nobel prize for work on developing countries, and helped create the U.N. Human Development Index, a yearly welfare indicator designed to gear international policy decisions to take account of health and living standards.

Stiglitz said France's ranking would rise in comparison to the U.S. because of better access to health care and because it has a lower percentage of people in jail. Active prison business boosts GDP figures but isn't a sign of economic health, he said.

The new system would also credit leisure time - which France has a lot of, he said.

Simon Tilford, chief economist at the Center for European Reform in London, said that while broader measures of well-being already exist, they are hugely subjective and don't help governments make decisions on how to allocate resources.

"There has been growing interest in trying to measure human well-being in other ways" than GDP, he said. But for understanding an economy's prospects, he said, "GDP is still a far superior measure to a type of softer, happiness or well-being index. That's not to say they're not useful, but it's hard to see how they could replace GDP."

In terms of GDP, French growth has lagged behind the U.S. throughout most of the past 30 years, although recent turmoil in financial markets has hit the U.S. economy harder.

France appears to be weathering the worst economic downturn since the Great Depression better than most, recording a small level of growth - 0.3 per cent - in the second quarter this year.

Consumer spending edges up in July, incomes flat

In the July 28, 2009 article "Consumer spending edges up in July, incomes flat," Associated Press economics writer Martin Crutsinger reports that the signs of potential economic recovery are mixed:

WASHINGTON – Consumer spending edged up in July with help from the popular Cash for Clunkers program, but household incomes, the fuel for future spending increases, were flat.

Consumer spending is the big question mark as the economy struggles to emerge from the recession. Economists worry that households hurt by rising unemployment, weak income growth and depleted investments will not provide the support the economy needs to rebound to sustained growth.

The Commerce Department said Friday that consumer spending rose 0.2 percent in July, matching economists' expectations. Personal incomes were unchanged last month, a weaker showing than the expected 0.2 percent gain.

With incomes flat in July as spending rose, the personal savings rate dipped slightly to 4.2 percent from 4.5 percent in June. The savings rate was 2.6 percent a year ago.

Economists expect the savings rate to rise in coming months to around 6 percent as workers try to rebuild depleted nest eggs. The process of rebuilding savings is one of the factors expected to depress consumer spending and weaken the broader recovery.

The modest rise in spending last month followed a 0.6 percent jump in June, a gain driven by a surge in gasoline prices. Adjusting for inflation, spending rose 0.2 percent in July, and 0.1 percent in June.

The slight rise in spending reflected a 1.3 percent jump in purchases of durable goods such as cars, a gain propelled by the clunkers program that started at the end of July. Purchases of nondurable goods such as clothing actually fell 0.3 percent last month.

The unchanged reading for personal incomes followed large swings in the previous two months that reflected payments to individuals from the government's $787 billion economic stimulus program. Those payments pushed incomes up 1.4 percent in May and their absence in June caused incomes to fall 1.1 percent.

Incomes have taken a beating during the recession as employers slashed payrolls and forced workers to take unpaid days off to hold down wage costs. In addition, households with sufficient income to hit the shopping malls have trimmed their purchases and boosted savings to cope with a severe financial crisis which sent the stock market into a nosedive last year.

The concern is that consumer spending, which accounts for 70 percent of economic activity, may not be strong enough to propel a sustained recovery from the longest recession since World War II.

The Federal Reserve has pushed a key interest rate to a record low near zero in an effort to boost the economy and is pledging to keep rates low for a considerable period even as the economy begins to grow again.

The Fed is able to make that pledge because inflation is not a problem. A price gauge tied to consumer spending was unchanged in July after a 0.5 percent jump in June that had reflected a big rise in energy prices. Excluding food and energy, the price gauge showed a 0.1 percent rise, and over the past year increased 1.4 percent, well within the Fed's comfort zone for inflation.

The government reported Thursday that the overall economy, as measured by the gross domestic product, fell at an annual rate of 1 percent in the April-June quarter. It marked the fourth consecutive decline in GDP, the longest stretch on records that go back more than six decades.

Many economists believe GDP in the current July-September quarter will rebound to growth above 3 percent and remain at that level in the fourth quarter. The economic growth likely will reflect a boost from the highly successful clunkers program to boost car sales and other government stimulus efforts.

But the fear is that economic growth will slip back in the early part of 2010 as the impact of the government programs fade and unemployment rises. The 9.4 percent jobless rate in July is expected to edge up to 9.5 percent in August and keep rising until it tops 10 percent. That will be a tough environment to see strong gains in consumer spending.

Some analysts worry that the country could be headed for a double-dip recession in which the economy resumes growing for a brief period only to fall back into a downturn.

The troubles consumers face have meant tough times for the nation's retailers. A survey of big retail chains showed that shoppers remained tightfisted in July, a development that raised worries about back-to-school sales and the holiday shopping season later this year.

In July, mall-based apparel stores fared the worst with Macy's Inc. and teen retailers Abercrombie & Fitch Co. and Wet Seal Inc. reporting disappointing results.

However, apparel discounters like Ross Stores Inc. and TJX Cos. both reported sales gains that exceeded Wall Street estimates. TJX operates the T.J. Maxx and Marshalls chains.

The final goods approach to measuring gross domestic product (GDP)

Jay Kaplan explains the final goods approach to measuring gross domestic product (GDP) on the Colorado University website:

Unit 6 - Components of GDP - Final Goods Approach

Consumption (C)

The consumption of goods and services falls under one of the following categories:

Durable goods - The consumption of durable goods is considered similar to a consumer investment. Durable goods are purchased with the intention of keeping them for a sustained duration of time. Examples of durable consumer purchases include washing machines, refrigerators, automobiles, and toaster ovens.

Nondurable goods - In contrast to durable goods, nondurable items have a shorter life span. An example of a nondurable consumer purchase is groceries. The life span of the typical food is short, especially compared with the refrigerator (durable item) in which perishable foods are kept. Other examples of purchases that are considered nondurables include newspapers, magazines, clothing, and hats (which are always flying off with the wind).

Services - Since the 1960s the fastest growing component of consumer purchases has been the area of services. Services include medical treatment, lawyers, and dry cleaners.

Investment (I)

Businesses and corporations undertake investment activity that involves the purchase of goods which themselves assist in the production process. The categories of investment are:

Business Investment - This includes the actual purchases of goods used in the production process. Business investment includes the construction of new offices and factories, and the purchase of machinery, computers, and any other equipment used to assist labor in the production of goods and services.

Business investment counts as gross investment, which includes purchases of machinery to replace worn-out equipment. If a firm replaces one machine with another that does not increase output, then nothing is added to the nation's economy. To correct for this, net investment can be used, which subtracts out depreciation of existing capital from the gross (total) business investment made by firms.

Residential Construction - This part of overall investment tracks the actual construction of housing, not the sale of homes. A new home that is built during a given year is counted in that year's GDP, while the purchase of a previously owned house has already been counted in the GDP of the year it was constructed. In this way, only those residences that add to the overall housing stock count towards GDP.

Changes in inventories - Firms invest in inventories, which are produced goods held in storage in anticipation of later sales. Firms also stockpile raw materials and intermediate goods used in the production process. Goods held in inventories are counted for the year produced, not the year sold.

Although inventories are a relatively small portion of the overall investment sector, inventories are a critical component of changes in GDP over the business cycle. If the economy is slowing down, possibly entering a recession, the bearer of the bad news will often be an undesired accumulation of inventories. As consumers reduce their purchases, sales of goods and services slow, inventories build up, and firms slash production (laying off employees) to reduce unwanted (and costly) inventories.
This last point is worth emphasizing because of its relationship to the business cycle which will be discussed in Topic 4. Inventories can be considered a part of a group of leading indicators of business cycles. By leading indicator, we mean that changes in a variable such as business inventories can lead to changes in the future condition of the economy. To explain the linkage between changes in the level of business inventories in many economic sectors and economic growth, let us consider two cases: an undesired accumulation of inventory, and an undesired decrease in business inventories. We will look at the economy as a whole.

The economic impact of an undesired accumulation or increase in business inventories. Businesses plan ahead and forecast future sales. Based on their expectations, they stockpile inventories of goods the expect to sell in the near future. The reason is simple. Businesses want the goods available to meet customer demands or else they will lose the sale, and most likely lose it to a competitor. If there is a slowdown in consumption in many economic sectors, then many businesses will not sell as many goods as they had planned to. As a result, businesses will not sell off their inventories of goods as they had planned and inventories will accumulate.

When inventories accumulate due to a decrease in consumption, businesses respond by reducing orders of goods from producers. In turn, as producers face a cutback in demand for their goods, they will decrease output. When inventories are accumulating in many sectors of the economy, reductions in the production of goods becomes widespread, and as firms reduce their output, many workers are laid off. As payrolls are reduced, the number of unemployed swells and the unemployment rate rises. With the reduction in output, GDP growth falls and if the drop in production is sharp enough, the economy goes into a recession.

The opposite occurs with an undesired or unanticipated decrease in inventories. If demand for goods are greater than businesses had forecast, inventories will be rapidly depleted. As firms restock their inventories and adjust for a higher level of sales, they increase their production. Increases in output requires firms to employ more workers. If this is occurring throughout the economy, the unemployment rate will fall as more individuals find jobs and economic output will increase. This leads to a jump in economic growth as measured by GDP.

The surge in demand for goods and services as well as the responding hike in production and employment comes at a possible cost. As more jobs are created, incomes rise, further contributing to an increase in the demand for goods and services. The potential result is a rise in the inflation rate due to demand-pull effects. Demand-pull inflation results from price pressures caused by rising demand for a good. In addition, cost-push pressures may also lead to greater inflation. As firms increase their output and demand for labor, wages may rise, especially if the economy was already near or at full-employment. Higher wages increase production costs that may be passed on to the consumer in the form of higher prices for goods.
The important point made here is that although inventories are a relatively minor component of GDP, rapid changes from their desired levels can have important economic consequences. When inventories accumulate beyond desired levels, an economic slowdown may be on the horizon as producers reduce their output. Or if inventories are rapidly being depleted, then economic growth and possibly inflation may soon rise as wage and price pressures build. Economic analysts monitor the divergence of inventories from desired levels as a leading indicator of potential changes in future economic growth rates.

Government Spending (G)

The government sector tracks what the government actually spends money on. Government purchases of goods and services include stealth bombers, government-funded research, space shuttles, salaries, and toasters. Many of these items are seldom sold in markets; as a result, they are valued at the price the government pays for them. The calculation of government spending for GDP purposes excludes several tremendous categories of actual spending: transfer payments, which redistribute income primarily to individuals who are potential consumers, and interest payments on the debt.

Last updated January 15, 1999

An illustration of nominal gross domestic product (GDP) per capita based on 2008 data from the International Monetary Fund (IMF).

Nominal gross domestic product (GDP) per capita based on 2008 data from the International Monetary Fund (IMF).

Obama: stimulus helped 'put brakes' on recession

President Barack Obama claims government spending has helped slow the U.S. economic decline:

WASHINGTON (AFP) – President Barack Obama said on Saturday that new economic data indicated a huge stimulus package approved in February had helped "put the brakes" on a deep recession.

Obama, speaking in his weekly radio address, referred to figures released Friday that showed a narrower-than-expected 1.0 percent decline in GDP in the second quarter.

"The report showed that in the first few months of this year, the recession we faced when I took office was even deeper than anyone thought at the time. It told us how close we were to the edge," Obama said.

"But it also revealed that in the last few months, the economy has done measurably better than expected. And many economists suggest that part of this progress is directly attributable" to the 787 billion dollar economic stimulus package known as the Recovery Act, he said.

"This and the other difficult but important steps that we have taken over the last six months have helped put the brakes on this recession," he said.

The Recovery Act included help for homeowners in danger of foreclosure to pay their mortgages; measures to unfreeze credit markets; extensions of unemployment benefits; tax cuts for middle-income Americans; and "investments that are putting people back to work rebuilding and renovating roads, bridges, schools, and hospitals.

"Now, I realize that none of this is much comfort for Americans who are still out of work or struggling to make ends meet," Obama said, noting that unemployment figures out next week are likely to remain bleak.

However economic growth precedes job growth, he said, and the Friday report "is an important sign that we're headed in the right direction.

"Business investment, which had been plummeting in the past few months, is showing signs of stabilizing. This means that eventually, businesses will start growing and hiring again," he said.

Obama warned that a full recovery would take time. "It will take many more months to fully dig ourselves out of a recession -- a recession that we've now learned was even deeper than anyone thought," he said.

The Commerce Department report out Friday lent credence to forecasts that the world's biggest economy was close to emerging from a recession that began in December 2007.

The US jobless rate hit a 26-year high of 9.5 percent in June as more employers retrenched. Some expect the unemployment rate to rise to 10 percent or higher.

Commerce Department revised figures showed a 6.4 percent decline in the first quarter of 2009, worse than the previous estimate of a 5.5 percent drop. In the fourth quarter of 2008, the drop was revised to 5.4 percent instead of 6.3 percent.

Other revisions from 2008 showed a weaker GDP than originally estimated, with growth of 0.4 percent for the full year instead of 1.1 percent.

Some economists warn that rising unemployment could dampen any economic recovery.

US economy appears poised to start growing again

In US economy appears poised to start growing again, Associated Press economics writer Jeannine Aversa reports:

WASHINGTON – At long last, the worst recession since World War II appears on the verge of ending.

The economy dipped only slightly in the second quarter of this year — falling at a 1 percent annual pace, better than expected. And many analysts think the economy is starting to grow again in the current quarter, setting up a long-awaited recovery.

Still, any rebound is likely to be restrained by consumers' reluctance to spend. Stressed by rising unemployment, smaller paychecks and shrunken nest eggs, Americans spent less in the second quarter. Without the full strength of consumer spending, which supplies more than two-thirds of U.S. economic activity, businesses would need to deliver more of the firepower for sustained growth.

Economists say they are hopeful that consumers, aided by the "cash for clunkers" program to boost car sales, eventually will nudge up spending. Over time, that would help stem a still-heavy wave of job losses and stimulate hiring.
"We won't have a recovery as long as we keep losing jobs," President Barack Obama acknowledged Friday.

He added: "Eventually, businesses will start growing again and will start hiring again, and that's when it will truly feel like a recovery to the American people."

The small drop in gross domestic product for the April-to-June period, reported Friday by the Commerce Department, followed a dizzying free fall in the first three months of this year. The economy plunged at an annual rate of 6.4 percent in the first quarter, the worst in nearly three decades.

Including the April-to-June period, the economy has now contracted for a record four straight quarters, for the first time on record dating to 1947. Over that period, companies and ordinary Americans have suffered a painful toll, with job losses still exceeding a net total of 400,000 each month.

Many economists had predicted a slightly worse 1.5 percent annualized contraction in second-quarter GDP, which is considered the best gauge of U.S. economic health. GDP measures the value of all goods and services — everything from cars, clothes and computers to makeup, manicures and machinery — produced in the United States.

"The recession seems to be largely over with at this point," said economist Joel Naroff, president of Naroff Economic Advisors. "We still have a long way to go to get back to full health."

Behind the better second-quarter performance were other signs of a fading recession: less drastic spending cuts by businesses, a resumption of federal and local government spending and an improved trade picture.

Businesses did end up cutting their stockpiles of goods at a record pace in the second quarter, but that carries a silver lining. With their inventories at rock-bottom, businesses will likely need to ramp up production to meet customer demand. That would stimulate the economy starting in the current quarter.

Some economists think growth in the July-to-September quarter could be more vigorous than previously forecast — possibly 3 percent annual growth or higher.

Obama's stimulus package of tax cuts and increased government spending provided some support to the economy in the second quarter. But it will have more impact in the second half of this year as it extends its reach, economists said.
In the meantime, the damage caused by this recession runs deep.

The figures released Friday provide the most compelling evidence to date that the current recession has been the worst since the Great Depression. It has taken a 3.9 percent bite out of economic activity so far, said Mark Zandi, chief economist at Moody's Economy.com. Before this downturn, the most painful hit came in the 1957-58 recession, when GDP fell 3.8 percent, he said.

And in revisions to GDP figures that stretch back to the Great Depression, the Commerce Department now estimates the economy grew just 0.4 percent in 2008. That's much weaker than the 1.1 percent growth the government had earlier estimated.

Even if the recession ends later this year, the job market will remain weak. Companies are expected to keep cutting payroll through the rest of this year.

The Fed says unemployment — now at a 26-year high of 9.5 percent — will top 10 percent at the end of this year. Businesses won't likely boost hiring until they're certain the recovery has staying power.

In the second quarter, businesses — including home builders — continued to cut spending, though not nearly as much as they had earlier. That's one reason the economy didn't contract as much as feared.

Consumers retreated en masse. They sliced spending at a rate of 1.2 percent in the second quarter, after having nudged up purchases at a 0.6 percent pace in the first quarter. In large part, that's because wages and salaries have fallen for the past three quarters.

With people spending less, Americans' savings rate rose sharply — to 5.2 percent in the second quarter, the highest since 1998.

As important as savings is, many economists wish that consumers would save less and spend more right now to help propel the recovery.

"I'm praying, 'God, please don't encourage American households to save a lot more just yet,'" said Nariman Behravesh, chief economist at IHS Global Insight.

Recession eases; GDP dip smaller than expected

"A new government report shows the economy sank at a pace of just 1 percent in the second quarter of the year. It was a better-than-expected showing that provided the strongest signal yet that the longest recession since World War II is finally winding down." According to the July 31, 2009 article "Recession eases; GDP dip smaller than expected" by Associated Press economics writer Jeannine Aversa, the U.S. economy is still in recession, but the decline is slowing:

WASHINGTON – The economy sank at a pace of just 1 percent in the second quarter of the year, a new government report shows. It was a better-than-expected showing that provided the strongest signal yet that the longest recession since World War II is finally winding down.

The dip in gross domestic product for the April-to-June period, reported by the Commerce Department on Friday, comes after the economy was in a free fall, tumbling at an annual rate of 6.4 percent in the first three months of this year. That was the sharpest downhill slide in nearly three decades.

The economy has now contracted for a record four straight quarters for the first time on records dating to 1947. That underscores the grim toll of the recession on consumers and companies.

Many economists were predicting a slightly bigger 1.5 percent annualized contraction in second-quarter GDP. It's the total value of all goods and services — such as cars and clothes and makeup and machinery — produced within the United States and is the best barometer of the country's economic health.

"The recession looks to have largely bottomed in the spring," said Joel Naroff, president of Naroff Economic Advisors. "Businesses have made most of the adjustments they needed to make, and that will set up the economy to resume growing in the summer," he predicted.

Less drastic spending cuts by businesses, a resumption of spending by federal and local governments and an improved trade picture were key forces behind the better performance. Consumers, though, pulled back a bit. Rising unemployment, shrunken nest eggs and lower home values have weighed down their spending.

A key area where businesses ended up cutting more deeply in the spring was inventories. They slashed spending at a record pace of $141.1 billion. There was a silver lining to that, though: With inventories at rock-bottom, businesses may need to ramp up production to satisfy customer demand. That would give a boost to the economy in the current quarter.

The Commerce Department also reported Friday that the recession inflicted even more damage on the economy last year than the government had previously thought. In revisions that date back to the Great Depression, it now estimates that the economy grew just 0.4 percent in 2008. That's much weaker than the 1.1 percent growth the government had earlier calculated.

Also Friday, the government reported that employment compensation for U.S. workers has grown over the past 12 months by the lowest amount on record, reflecting the severe recession that has gripped the country.

Federal Reserve Chairman Ben Bernanke has said he thinks the recession will end later this year. And many analysts think the economy will start to grow again — perhaps at around a 1.5 percent pace — in the July-to-September quarter. That would be anemic growth by historical measures, but it would signal that the downturn has ended.

Naroff said he now thinks growth in the third quarter could turn out to be much stronger because companies will need to replenish bare-bone stockpiles of goods.

"You could get a huge swing in inventories that could create a much bigger growth rate than anybody expects," he said.
If that were to happen, it's possible the economy's growth could clock in around 4 percent in the current quarter, he said.
Obama's stimulus package of tax cuts and increased government spending provided some support to second-quarter economic activity. But it will have more impact through the second half of this year and will carry a bigger punch in 2010, economists said.

Even if the recession ends later this year, the job market will remain weak. Companies are expected to keep cutting payroll through the rest of this year, but analysts say monthly job losses likely will continue to narrow.

Still, unemployment — now at a 26-year high of 9.5 percent — will keep rising. The Fed says it will top 10 percent at the end of this year. Businesses will be unlikely to boost hiring until they're certain the recovery has staying power.

In the second quarter, businesses continued to cut all kinds of spending, but not nearly as much as they had been, one of the reasons the economy didn't contract as much.

For instance, they trimmed spending on equipment and software at a 9 percent pace in the second quarter, compared with an annualized drop of 36.4 percent in the first quarter. Similarly, they cut spending on plants, office buildings and other commercial construction at a rate of 8.9 percent, an improvement from the annualized drop of 43.6 percent in the first quarter.

Housing — which led the country into recession — continued to be a drag on the economy. Builders cut spending at a rate of 29.3 percent, also an improvement from the 38.2 percent annualized drop reported in the first quarter.
Consumers, meanwhile, did a slight retreat in the spring.

They sliced spending at a rate of 1.2 percent in the second quarter, after nudging up purchases at a 0.6 percent pace in the first quarter. It turns out that consumers didn't nearly have the appetite to spend in the first quarter as the government previously thought, according to revisions released Friday.

With consumers spending less on everything from cars to clothes, Americans' savings rate rose sharply — to 5.2 percent in the second quarter, the highest since 1998.

A return to spending by governments helped economic activity in the spring. The federal government boosted spending at pace of 10.9 percent, the most since the third quarter of 2008. And state and local governments increased spending at a pace of 2.4 percent, the most since the second quarter of 2007.

An improved trade picture also added to economic activity in the spring. Although exports fell, imports fell more, narrowing the trade gap. That added 1.38 percentage points to second-quarter GDP.

The convergence of a collapse in the housing market, a near shutdown of credit and a financial crisis created what Bernanke and others have called a perfect storm for the economy. Those negative forces — the scale of which hasn't been seen since the 1930s — plunged the country into a recession in December 2007. It is the longest since World War II.

Is the Recession Nearing an End?

In the July 27, 2009 editorial "GDP: Don't believe the hype," CNNMoney editor Paul R. LaMonica cautions:

Even if the government reports a surprise boost to second quarter GDP, few economists are predicting a massive recovery just yet.

This question seemed unthinkable to ask just a few months ago, but here goes: Did the economy actually grow during the past three months?

A few brave economists actually think it did. But we'll find out for certain on Friday when the government unveils its first take on gross domestic product (GDP) for the second quarter. Still, even the average forecast is for a drop of just 1.5%, significantly better than the previous two quarters.

GDP plunged 6% in the fourth quarter of 2008 and 5.5% in this year's first quarter.

"The pace of decline has slowed way down and we are seeing signs of stability. I expect a negative number in the second quarter but maybe zero growth or better for the third quarter," said Chris Probyn, chief economist with State Street Global Advisors in Boston.

Probyn argues that the recent improvement in home sales, consumer spending and exports is evidence that the recession may soon be nearing an end.

Talk back: Do you believe that the economy is really stabilizing or do you think the numbers don't tell the true story of the economy? Leave your comments at the bottom of this story.

Zach Pandl, an economist with Nomura Securities in New York, also thinks that the second quarter GDP report will reflect a stabilization in the economy and early stages of a recovery.

"The big story in terms of the second quarter is that contraction is getting close to zero. I wouldn't rule out a positive number," Pandl said. He said the primary reasons that the economy is getting closer to actually resuming growth are that businesses are finally showing a greater degree of confidence that the worst may be over.

Pandl expects a smaller decline in business investment during the quarter as well as a slower level of inventory reduction as companies begin to realize that economic conditions are slowly returning to normal after last fall's credit crunch paralyzed the financial markets.

"Companies are going through an adjustment from the shocks hitting the economy late last year," Pandl said.

Not everyone shares such a rosy view though.

"There has been an abatement of bad news rather than emergence of good news," said Diane Swonk, chief economist with Mesirow Financial, a diversified financial services firm based in Chicago. "Stabilization in a deep hole is not something to pop champagne corks over."

Swonk said she remains concerned about the effect that lingering job losses and high unemployment could have on consumers.

A weak labor market, coupled with banks continuing to tighten credit standards, could mean that even if the economy technically emerges from recession this year, a recovery could be dampened by anemic consumer spending.

Kurt Karl, chief U.S. economist with Swiss Re, agreed that consumers may still be a little cautious and that until consumers turn the corner, it's tough to imagine how the economy can show overall growth.

Karl said that there isn't likely to be as much of a boost to consumer spending from tax breaks in this year's stimulus package as there was from tax rebates a year ago.

Last year, the economy grew at a nearly 3% annual rate in the second quarter, but that turned out to be a short-term sugar rush.

"Stimulus didn't dribble out much as it did last year and some of that money was saved," he said, adding that he believes personal spending dipped slightly in the second quarter and that GDP fell at a 1.8% rate.

Finally, both Pandl and Probyn noted that the second quarter report may need to be looked at a lot more closely than most. That's because the Commerce Department will be including so-called benchmark revisions to much of the data used to calculate GDP, particularly to the savings rate and personal income.

This revision is the first since the end of 2003 and the changes could very well wind up showing that the economy was in worse shape a year ago than originally reported.

"The comprehensive revisions are going to be a bit of a wild card since it could change our view of recent history," Probyn said. "The changes will affect every quarter, and I bet that the gains in the second quarter of last year will be revised away."

While it may seem that changing the numbers from prior quarters is something that only matters to academics, that's not the case.

If it turns out, for example, that the savings rate is higher than once thought, that could be further proof that consumers are really changing their behavior. And even though that's good news for the long-term, it could make it tougher for the economy to grow at a robust pace over the next year or so.

Talkback: Do you believe that the economy is really stabilizing or do you think the numbers don't tell the true story of the economy?

What is a recession and how does it differ from a depression?

A recession is a sustained decrease in economic activity that is typically accompanied by decreases in employment, national income, and the production of goods and services. An unofficial way to estimate the existence a recession is to look for at least two consecutive quarters of declines in gross domestic product (GDP). The official calculations are more complex and are conducted by the National Bureau of Economic Research (NBER).

A depression is a severe and prolonged recession.

See also "Recessions & Depressions: Questions & Answers."

Recessions & Depressions: Questions & Answers

A recession is a sustained decline in economic activity characterized by declines in national income, total output of goods and services, and employment.

A depression is an extremely severe recession.

Recessions and depressions occur when there is a prolonged decrease in overall spending on newly produced goods and services, which economists call aggregate demand (AD).

Gross domestic product (GDP) is the total value of new domestically produced final goods and services.

Aggregate Demand (AD) for Gross Domestic Product (GDP) = Consumption (mostly by households) + Investment (mostly by businesses) + Government Purchases (on newly produced goods and services) + Exports to foreign purchasers – Imports from foreign producers

AD (for newly produced U.S. goods & services) = C + I + G + X – M

Click on the questions below to link to the answers.

What is a recession and how does it differ from a depression?

What causes recessions and depressions?

Should the government do anything to prevent economic declines?

What types of government policies reduce the severity of recessions and reverse economic declines?

What about the supply-side argument that tax cuts induce businesses to increase investment and create jobs?

GDP data: C + I + G + X - M

Gross domestic product is the total value of final goods and services produces in the economy in a given time period (usually a year).

Gross Domestic Product = Consumption + Investment + Government Purchases + Exports - Imports

GDP = C + I + G + X - M

The Economic Report of the President provides U.S GDP data since 1959.

Table B-1 (Gross domestic product) provides nominal GDP data. They are not adjusted for inflation.
Table B-2 (Real gross domestic product) provides GDP data adjusted for inflation.

In both tables, consumption (C) and investment (I) data appear on the first page of the Excel spreadsheet. The data for government purchases (G), exports (X), and imports (M) are provided on page 2 of each spreadsheet.

GDP: durable goods, nondurable goods, services, and structures.

Gross domestic product (GDP) can be divided into four categories: durable goods, nondurable goods, services, and structures.

Table B-8 (Gross domestic product by major type of product) of the Economic Report of the President provides annual data from 1959.

The Composition of U.S. Gross Domestic Product (GDP)

Source: The U.S. Economy: You Are Here

The Composition of GDP

A Closer Look at the Measurement of Economic Growth

The Composition of GDP

Gross domestic product can be broken down into several categories based on the type of goods and services produced. For example, the output of the country can be divided into durable goods, non-durable goods, services, and structures.

GDP = durable goods + non-durable goods + services + structures

Durable goods are products that are used over a long period of time. Refrigerators, washing machines, and cars are examples of durable goods. Non-durable goods are products that are consumed over a short period of time. Food and clothing are examples of non-durable goods. Services are products that typically do not create a tangible commodity. Banking services, haircuts, and entertainment are examples of services. Structures are buildings. Over half of U.S. GDP is services.

Durable goods orders are sometimes used as an indicator of the health of the U.S. economy.

Gross domestic product also can be broken down into several categories based on the purchaser of the newly produced goods and services. This alternative way to divide GDP involves separating it into consumption spending, investment spending, government purchases, exports, and imports.

Source: The U.S. Economy: You Are Here

An equation that illustrates this relationship is:

GDP = C + I + G + X - M
where:
C = consumption spending
I = investment spending
G = government purchases
X = exports
M = imports

Consumption is the purchase of final goods and services by households. Investment is the purchase of capital equipment, inventories, and structures. Most of this is done by businesses. The purchase of a home by a household, however, is also considered to be investment.
Government purchases are payments made in exchange for currently produced goods and services. This includes salaries of current government workers, vehicles purchased for government use, and supplies for government offices. Government purchases do not include transfer payments. A transfer payment is a government payment not made in exchange for a good or service. Social Security benefits, retirement checks paid to former government employees, and welfare benefits are examples of transfer payments. Exports are goods and services sold by domestic producers to foreign purchasers. For example, a jet fighter manufactured in the U.S. and purchased by the government of Egypt is an exported good. Imports are goods and services sold by foreign producers to domestic purchasers. The domestic purchasers might by households, businesses, or the government. For example, a Mercedes-Benz automobile manufactured in Germany and sold to an American consumer is an imported good.

The difference between exports and imports (X – M) is referred to as net exports (NE). Thus an alternative way to write the equation for gross domestic product is:

GDP = C + I + G + NE

Economic Growth - Topics

GDP per capita

Gross domestic product (GDP) per capita (also called per capita GDP) is a country's GDP divided by its population. It provides an estimate of the average annual income of a person living in that country. If one is interested in estimating a nation's standard-of-living, GDP per capita is generally preferable to GDP.

Gross domestic product measures the total output produced in a country. It does not consider the country’s population, however. China has the second largest national GDP (behind the United States). Because China’s population is so large, however, the GDP data do not accurately represent the average value of the goods and services available to each person. Most economists suggest a better measurement of standard-of-living is per capita GDP.

Per capita GDP measures the nominal value of a country’s output per person. It is calculated by dividing nominal GDP by the country’s population. It is a measure of the income of an average person in the country.
U.S. GDP in 2003 was $11.003 trillion. The U.S. Census Bureau’s estimate of the U.S. population on July 1, 2003 is 290,809,777. Thus, an estimate of per capita GDP in the United States in 2003 is $37,836.

per capita GDP = nominal GDP / population
= $11.003 trillion /290,809,777 = $37,836 per person

Test your understanding of the difference between GDP and per capita GDP

Per capita GDP is more useful than GDP when comparing the standard of living in various countries. To illustrate this, consider two economies. Country A has a nominal GDP of $1 billion. Country B has a nominal GDP of $100 million. Which country has the higher standard of living?

The answer depends on each country’s population:

If country A has a population of 1 billion people, then its per capital GDP is $1 per person.

per capita GDP = nominal GDP / population
= $1 billion / 1 billion people = $1 per person

If country B has a population of 1,000 people, then its per capita GDP is $100,000 per person.

per capita GDP = nominal GDP / population
= $100 million / 1,000 people = $100,000 per person


GDP per capita

The following table ranks the countries of the world by per capita GDP using the data available from the U.S. Central Intelligence Agency (CIA) in May 2009. Notice that China’s ranking by per capita GDP (133rd) is significantly lower than its ranking by GDP (2nd).

Economic Growth - Topics

The Importance of Economic Growth – from a Geographical Perspective

Would you want to trade places with the average resident of most African countries?
Why not? Your answer probably has something to do with standard of living.
One measure of standard of living is gross domestic product (GDP). GDP is the total value of all final goods and services produced in a country during a given period. The following table ranks the countries of the world by GDP using the data available from the U.S. Central Intelligence Agency (CIA) in May 2009.

GROSS DOMESTIC PRODUCT in 2008 (Purchasing Power Parity)
RANK	COUNTRY	GDP (PPP)
1	World	$69,490,000,000,000
2	European Union	$14,820,000,000,000
3	United States	$14,290,000,000,000
4	China	$7,800,000,000,000
5	Japan	$4,348,000,000,000
6	India	$3,267,000,000,000
7	Germany	$2,863,000,000,000
8	United Kingdom	$2,231,000,000,000
9	Russia	$2,225,000,000,000
10	France	$2,097,000,000,000
11	Brazil	$1,990,000,000,000
12	Italy	$1,821,000,000,000
13	Mexico	$1,559,000,000,000
14	Spain	$1,378,000,000,000
15	Canada	$1,307,000,000,000
16	Korea, South	$1,278,000,000,000
17	Indonesia	$915,900,000,000
18	Turkey	$906,500,000,000
19	Iran	$842,000,000,000
20	Australia	$800,500,000,000
21	Taiwan	$738,800,000,000
22	Netherlands	$670,200,000,000
23	Poland	$667,400,000,000
24	Saudi Arabia	$582,800,000,000
25	Argentina	$575,600,000,000
26	Thailand	$553,400,000,000
27	South Africa	$489,700,000,000
28	Pakistan	$452,700,000,000
29	Egypt	$442,600,000,000
30	Colombia	$399,400,000,000
31	Belgium	$390,500,000,000
32	Malaysia	$386,600,000,000
33	Venezuela	$357,900,000,000
34	Sweden	$348,600,000,000
35	Greece	$343,600,000,000
36	Nigeria	$338,100,000,000
37	Ukraine	$337,000,000,000
38	Austria	$325,000,000,000
39	Philippines	$320,600,000,000
40	Switzerland	$309,900,000,000
41	Hong Kong	$307,600,000,000
42	Romania	$271,200,000,000
43	Czech Republic	$266,300,000,000
44	Norway	$256,500,000,000
45	Chile	$245,300,000,000
46	Vietnam	$241,800,000,000
47	Singapore	$240,000,000,000
48	Peru	$238,900,000,000
49	Portugal	$237,300,000,000
50	Algeria	$235,500,000,000
51	Bangladesh	$224,000,000,000
52	Hungary	$205,700,000,000
53	Denmark	$204,900,000,000
54	Israel	$200,700,000,000
55	Finland	$195,200,000,000
56	Ireland	$191,900,000,000
57	United Arab Emirates	$184,600,000,000
58	Kazakhstan	$176,900,000,000
59	Kuwait	$149,100,000,000
60	Morocco	$137,300,000,000
61	Slovakia	$119,500,000,000
62	New Zealand	$116,600,000,000
63	Belarus	$114,100,000,000
64	Iraq	$112,800,000,000
65	Angola	$110,300,000,000
66	Cuba	$108,200,000,000
67	Ecuador	$107,100,000,000
68	Syria	$95,360,000,000
69	Bulgaria	$93,780,000,000
70	Sri Lanka	$91,900,000,000
71	Libya	$88,860,000,000
72	Sudan	$87,270,000,000
73	Qatar	$85,350,000,000
74	Tunisia	$81,880,000,000
75	Serbia	$80,740,000,000
76	Dominican Republic	$77,430,000,000
77	Azerbaijan	$73,650,000,000
78	Croatia	$73,360,000,000
79	Uzbekistan	$71,630,000,000
80	Puerto Rico	$70,590,000,000
81	Guatemala	$68,020,000,000
82	Oman	$67,000,000,000
83	Ethiopia	$66,290,000,000
84	Lithuania	$63,250,000,000
85	Kenya	$61,830,000,000
86	Slovenia	$59,140,000,000
87	Yemen	$55,290,000,000
88	Burma	$55,040,000,000
89	Tanzania	$54,260,000,000
90	Costa Rica	$48,480,000,000
91	Lebanon	$44,070,000,000
92	El Salvador	$43,940,000,000
93	Bolivia	$43,080,000,000
94	Cameroon	$42,760,000,000
95	Uruguay	$42,460,000,000
96	Korea, North	$40,000,000,000
97	Luxembourg	$39,420,000,000
98	Latvia	$38,980,000,000
99	Panama	$38,490,000,000
100	Uganda	$35,880,000,000
101	Ghana	$34,040,000,000
102	Cote d'Ivoire	$34,000,000,000
103	Honduras	$33,630,000,000
104	Nepal	$31,090,000,000
105	Jordan	$30,760,000,000
106	Bosnia and Herzegovina	$29,900,000,000
107	Turkmenistan	$29,650,000,000
108	Paraguay	$28,710,000,000
109	Cambodia	$27,950,000,000
110	Estonia	$27,720,000,000
111	Bahrain	$26,700,000,000
112	Botswana	$26,040,000,000
113	Trinidad and Tobago	$24,190,000,000
114	Afghanistan	$23,030,000,000
115	Cyprus	$22,690,000,000
116	Senegal	$21,900,000,000
117	Albania	$21,820,000,000
118	Georgia	$21,600,000,000
119	Gabon	$21,440,000,000
120	Congo, Democratic Republic of the	$21,050,000,000
121	Jamaica	$20,880,000,000
122	Madagascar	$20,760,000,000
123	Brunei	$20,250,000,000
124	Equatorial Guinea	$19,370,000,000
125	Mozambique	$18,950,000,000
126	Armenia	$18,920,000,000
127	Macedonia	$18,520,000,000
128	Macau	$18,140,000,000
129	Burkina Faso	$17,820,000,000
130	Zambia	$17,390,000,000
131	Nicaragua	$16,830,000,000
132	Chad	$16,260,000,000
133	Congo, Republic of the	$15,600,000,000
134	Tajikistan	$15,400,000,000
135	Mauritius	$15,360,000,000
136	Mali	$14,480,000,000
137	Laos	$13,990,000,000
138	Papua New Guinea	$13,290,000,000
139	Benin	$12,840,000,000
140	Iceland	$12,150,000,000
141	Gaza Strip	$11,950,000,000
142	West Bank	$11,950,000,000
143	Haiti	$11,590,000,000
144	Malawi	$11,560,000,000
145	Kyrgyzstan	$11,410,000,000
146	Namibia	$11,230,000,000
147	Moldova	$10,630,000,000
148	Guinea	$10,440,000,000
149	Malta	$9,801,000,000
150	Niger	$9,784,000,000
151	Mongolia	$9,557,000,000
152	Rwanda	$9,061,000,000
153	Bahamas, The	$8,779,000,000
154	Montenegro	$6,600,000,000
155	Mauritania	$6,310,000,000
156	Swaziland	$5,703,000,000
157	Somalia	$5,524,000,000
158	Barbados	$5,466,000,000
159	Togo	$5,105,000,000
160	Jersey	$5,100,000,000
161	Kosovo	$5,000,000,000
162	French Polynesia	$4,718,000,000
163	Bermuda	$4,500,000,000
164	Sierra Leone	$4,307,000,000
165	Suriname	$4,256,000,000
166	Liechtenstein	$4,160,000,000
167	Eritrea	$3,946,000,000
168	Bhutan	$3,789,000,000
169	Andorra	$3,660,000,000
170	Fiji	$3,616,000,000
171	Lesotho	$3,370,000,000
172	Central African Republic	$3,239,000,000
173	New Caledonia	$3,158,000,000
174	Burundi	$3,103,000,000
175	Guyana	$3,010,000,000
176	Netherlands Antilles	$2,800,000,000
177	Guernsey	$2,742,000,000
178	Isle of Man	$2,719,000,000
179	Timor-Leste	$2,713,000,000
180	Belize	$2,577,000,000
181	Guam	$2,500,000,000
182	Gambia, The	$2,264,000,000
183	Aruba	$2,258,000,000
184	Zimbabwe	$1,959,000,000
185	Cayman Islands	$1,939,000,000
186	Djibouti	$1,889,000,000
187	Saint Lucia	$1,801,000,000
188	Maldives	$1,738,000,000
189	San Marino	$1,662,000,000
190	Cape Verde	$1,635,000,000
191	Antigua and Barbuda	$1,610,000,000
192	Virgin Islands	$1,577,000,000
193	Liberia	$1,532,000,000
194	Seychelles	$1,473,000,000
195	Grenada	$1,211,000,000
196	Saint Vincent and the Grenadines	$1,103,000,000
197	Greenland	$1,100,000,000
198	Solomon Islands	$1,078,000,000
199	Gibraltar	$1,066,000,000
200	Samoa	$1,057,000,000
201	Faroe Islands	$1,000,000,000
202	Vanuatu	$983,200,000
203	Monaco	$976,300,000
204	Mayotte	$953,600,000
205	Northern Mariana Islands	$900,000,000
206	Western Sahara	$900,000,000
207	Guinea-Bissau	$857,000,000
208	British Virgin Islands	$853,400,000
209	Saint Kitts and Nevis	$784,900,000
210	Comoros	$741,400,000
211	Dominica	$719,800,000
212	American Samoa	$575,300,000
213	Tonga	$549,100,000
214	Kiribati	$357,400,000
215	Sao Tome and Principe	$276,600,000
216	Micronesia, Federated States of	$238,100,000
217	Turks and Caicos Islands	$216,000,000
218	Cook Islands	$183,200,000
219	Palau	$164,000,000
220	Marshall Islands	$133,500,000
221	Anguilla	$108,900,000
222	Falkland Islands (Islas Malvinas)	$105,100,000
223	Nauru	$60,000,000
224	Wallis and Futuna	$60,000,000
225	Saint Pierre and Miquelon	$48,300,000
226	Montserrat	$29,000,000
227	Saint Helena	$18,000,000
228	Tuvalu	$14,940,000
229	Niue	$10,010,000
230	Tokelau	$1,500,000

Source: CIA World Factbook, 2008. These calculations were made using the purchasing power parity (PPP) technique. This is designed to make the numbers more comparable by adjusting for differences in the cost of products in different countries.

A note in The World Factbook provides a more detailed explanation:

This entry gives the gross domestic product (GDP) or value of all final goods and services produced within a nation in a given year. A nation's GDP at purchasing power parity (PPP) exchange rates is the sum value of all goods and services produced in the country valued at prices prevailing in the United States. This is the measure most economists prefer when looking at per-capita welfare and when comparing living conditions or use of resources across countries. The measure is difficult to compute, as a US dollar value has to be assigned to all goods and services in the country regardless of whether these goods and services have a direct equivalent in the United States (for example, the value of an ox-cart or non-US military equipment); as a result, PPP estimates for some countries are based on a small and sometimes different set of goods and services. In addition, many countries do not formally participate in the World Bank's PPP project that calculates these measures, so the resulting GDP estimates for these countries may lack precision. For many developing countries, PPP-based GDP measures are multiples of the official exchange rate (OER) measure. The differences between the OER- and PPP-denominated GDP values for most of the wealthy industrialized countries are generally much smaller.

Economic Growth - Topics