There’s an easy answer to why the American economy did better than expected in the second quarter, according to the first estimate from the US Government.

In a word, it was the recession itself: higher government spending and falling imports, caused by the slump were the drivers for the 1% annual fall in GDP for the second quarter, a figure better than the 1.5% estimate from economists.

The smaller decline cheered many commentators and some in the market, but in reality the bald growth figures disguised a horrible truth: the American consumer stopped spending in the quarter. Consumer spending it fell a worrying 1.2% in the three months, after a rise of 0.6% in the first quarter when conditions were worse. These figures were partly based on estimates, and there are consumer spending numbers for June out this week and next which will give is a more accurate look for the second estimate later this month.

And while business spending and housing and construction investment improved, they were still very much in the negative. Imports helped offset a big fall in inventories in the quarter, but it was a 6% rise in Government spending in the quarter that boosted growth by 2%-3%, according to some estimates as the huge stimulus package from the Obama Administration finally kicked in.

As the Financial Times said at the weekend: “The US economy is not getting better — it is simply leaning ever more heavily on the state.”

The International Monetary Fund in its annual report on the U.S. economy said the recession seemed to be ending but cautioned recovery would be slow.

The Fund summed up the dilemma for the US and every other economy, including China’s as we look towards a recovery in 2010: “The U.S. consumer is unlikely to play the role of global “buyer of last resort” — suggesting that other regions will need to play an increased role in supporting global growth.”

The IMF forecast a fall this year for US GDP of 2.6% and growth next year of just 0.8%. No wonder Fed chairman Ben Bernanke and others from the central bank have been telling Americans that when it comes, the recovery will still feel like the recession.

The upshot of the GDP figures (and some extensive revisions) was that not only has US growth now fallen for four quarters in a row, but the low point in the March quarter was revised lower to a drop of 6.4% from the originally reported drop of 5.5%. (That was much closer to the original forecast as well and deeper than anyone had thought).

In the fourth quarter of 2008, GDP dipped at a 5.4% annual rate, together the two quarters represent the biggest quarterly falls in 26 years.

Business stocks again fell, which economists say will mean a rise in this or the 4th quarter as businesses rebuild inventories. (But others cautioned, saying stocks appear to have been rundown to accommodate the lower level of demand now coming from business and consumers, and they question that with unemployment rising, whether there will be a sharp rebound in demand in coming months.

But it’s not just the US where mixed messages and doubts continue about the sustainability of the current improvement.

Japan last week saw another solid rise in industrial output, which led some to forecast positive growth, but retail sales fell in June from a year ago and from May, unemployment rose to 5.4%, just before the recent high of 5.5% and consumer inflation fell sharply, especially on a core basis with energy and food excluded.

Prices also fell in Europe in the biggest fall on record: lower oil prices are having an impact, as in Japan, but they were also down on a core basis. Japanese unemployment hit 5.4%, within sight of the record 5.5% achieved in 2003.

Chinese manufacturing expanded again in July, according to figures released at the weekend, but it was the smallest rise possible, from 52.2 to 53.3. Positive, but not convincing.

Yes, things might have stabilised and be looking up in some areas, but what’s going to turn this into something more sustainable?

But the US Government statisticians also issued revisions for years stretching back from 2008 and some of these help to explain why the slowdown really did start in December 2007, even when there was still some apparent growth happening.

In fact the first 12 months of the US from the December quarter of 2007 to the same quarter of 2008, the economy contracted at more than twice the amount previously estimated and that in turn reflected an even bigger drop in consumer spending and housing.

The US Commerce Department said the economy contracted 1.9% from the fourth quarter of 2007 to the last three months of 2008, compared with the 0.8% drop previously estimated.

As revealed Friday, gross domestic product shrunk 3.9% from the second quarter of 2008 to June this year. That’s deepest ever, and yet analysts reckon the US economy is improving and will soon start blossoming (that’s what the optimists say). Not when consumers have run out of puff and not even Government stimulus spending can really give them the confidence to spend. We will see in this week’s personal spending numbers that the Us savings rate remains higher than it has been for the past decade as consumers continue batten down the hatches.

Consumer spending, which accounts for 70% of the economy, was 1.8% lower in last year’s fourth quarter from the same period in 2007, exceeding the earlier estimate of a 1.5%. Residential construction fell 21% during 2008, almost 2% points more than previously reported.

This slump has been longer, deeper and much tougher than anyone expected, or has managed to grasp for the past six quarters.

No wonder sharemarket investors and analysts are willing to believe any line, simply to escape the mind numbing destruction of value that they have played a major part in creating in the past few years.

During the period from the end of the 2001 recession to the fourth quarter of 2007, the new figures indicated the economy over all grew at an average annual rate of 2.7 percent, up a bit from the previously reported rate of 2.6 percent. But during the five quarters after that, through the first quarter of 2009, the economy declined at an annual rate of 4.2 percent, much worse than the previously reported 2.8 percent fall.

Peter Fray

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