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Economy Shrinks One Percent In Second Quarter

But rate of decline slows considerably

By Mark Huffman
ConsumerAffairs.com

July 31, 2009
It has hardly a surprise when the U.S. Commerce Department reported Friday that the Gross Domestic Product (GDP) shrank by one percent in the second quarter of 2009. The initial read on the economy in the April through June period is subject to revision.

With the worst recession since the Great Depression, economists were not expecting a turnaround. In fact, though the economy is currently showing some positive signs of growth, many don't expect positive growth in the economy until the fourth quarter of this year, at the earliest.

One big reason are consumers. In short, the consumer is saving, not spending. No longer able to tap home equity loans and with credit card limits being reduced, many consumers are hunkering down, putting off vacations and major purchases.

Meanwhile, unemployment has climbed from 8.5 percent at the beginning of the year to 9.5 percent in June. July's unemployment rate, scheduled for release next Friday, could be the first to cross into double digits. With so many Americans out of work, there is less money to spend.

On the positive side, the one percent decline in economic activity marks a big slowdown in what had been a free fall. In the fourth quarter of 2008, the economy contracted by 5.4 percent and fell 6.4 percent in the first quarter of 2009.

A drop of only one percent, economists say, suggests the economy could be near the point that it finally turns around and starts growing again. A quarter marked by actual growth would officially signal the end of the current recession. A recession is defined as two consecutive quarters of negative GDP, meaning the current recession officially began in December 2007.

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