Now, a Clear Reading on Recovery

Consumer spending figures are a key part of the GDP report. Consumers account for around two-thirds of total economic activity.
Consumer spending figures are a key part of the GDP report. Consumers account for around two-thirds of total economic activity. (By Eric Risberg -- Associated Press)
By Neil Irwin
Washington Post Staff Writer
Friday, July 31, 2009

Friday morning, word on how fast the U.S. economy shrunk this spring will cross financial wires -- and with it, new clarity on whether the deepest recession in generations is winding down.

The Commerce Department plans to announce gross domestic product data for the quarter from April through June. It is the broadest measure of the nation's economy. The report, on the value of goods and services the nation produced, generally looks backward, offering a historical view of where the economy has been.

This time, though, it will help answer one of the great questions of the summer -- is the economy on the verge of expanding again, or have signs of progress in other data represented a false dawn?

"The report will clear up many of the questions we have regarding the severity of the recession and whether the recession is in fact ending," said Mark Vitner, a senior economist at Wells Fargo.

In recent weeks, economic data -- and financial markets -- have been looking up. On Thursday, the stock market rose 1.2 percent as measured by Standard & Poor's 500-stock index, which hit its highest level since early November before retreating. The market is now up 12 percent from three weeks ago. There were similar gains around the world, with an index of European markets up 2.1 percent.

The rally came on earnings from Motorola and MasterCard that were weak but better than expected. Also, the Labor Department reported that 584,000 people filed new claims for unemployment insurance benefits last week, higher than a week earlier yet the fourth straight week below 600,000.

Economists expect the GDP to have fallen at a 1.5 percent annual rate in the second quarter -- much softer than the 5.5 percent rate of decline in the first three months of the year. Wherever that headline number ends up, it is the details that will offer the best evidence of whether the economy is poised to grow again.

For example, part of the decline is expected to be caused by continued cutbacks in business inventories. Businesses aggressively cut the goods in their warehouses and store shelves through the winter, a pattern that likely continued in the second quarter.

Vitner forecasts that inventories were slashed at a $100 billion annual rate, compared with $87 billion in the first quarter. If the amount turns out to be significantly higher than he forecasts, the overall number for the second quarter would look worse -- but it would bode well for the economy in the remainder of the year.

Another key element of the report is data on consumer spending in the second quarter. Consumers account for around two-thirds of total economic activity, and they must ultimately return to stores and make purchases for the economy to get back on its feet.

At the same time, consumers are under severe pressure from continued job losses and declines in housing- and stock-market wealth. So if they continue showing little capacity to spend, an economic recovery would be weak or nonexistent.

Economists expect personal consumption expenditures to have fallen at a 0.5 percent rate in the second quarter, after rising in the first quarter. Even that weak level of spending was supported by the government stimulus package, which resulted in higher after-tax income for most Americans in the late spring.

A higher number would both strengthen the overall second-quarter GDP and suggest that those consumers -- at least those who still have jobs -- are confident enough to make purchases.

"My expectation would be that we'll get back to modest growth in consumer spending in the third quarter, but that's probably the biggest Achilles' heel in the outlook," said Brian Bethune, chief financial economist at IHS Global Insight, a consulting firm.

Housing is another unlikely area of support for an economic recovery. Residential investment has fallen for 13 straight quarters -- and that is widely expected to have hit 14 in the second quarter. But now, housing investment has fallen so low that analysts think it has no real room to keep descending. Based on housing permits being issued, they now expect it will tick up from its current depressed levels as the year progresses.

Accompanying Friday's release of GDP data will be revisions to the numbers going back five years. That could also shed some light on the current state of the economy.

Economists have been mystified by a seeming contradiction -- the job market has performed far worse in the last 18 months than one would expect given the extent to which companies have cut back on production.

If 2008 GDP data are revised to indicate that the decline was steeper than originally reported, it would help solve the mystery, putting the job losses and production cutbacks more in line with each other. If the 2008 data are revised up, or if earlier estimates are confirmed, it would confound the analysts even more, suggesting either that businesses were far more eager to cut jobs in this downturn than in past ones, or that productivity is rising rapidly.

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