Iraq death toll

Economic Rebound

By JEANNINE AVERSA, AP Economics Writer Thu Jul 31, 11:06 AM ET

WASHINGTON - The country didn't get the energetic rebound in economic growth hoped for from the government's tax rebates in the second quarter, and the economy jolted into reverse at the end of 2007, raising new recession fears.

The Commerce Department reported Thursday that gross domestic product, or GDP, increased at an annual rate of 1.9 percent in the April-to-June period. That marked an improvement over the feeble 0.9 percent growth logged in the first quarter of this year and the outright contraction in the economy during the final quarter of last year.

Still, the second-quarter rebound wasn't as robust as economists had hoped; they were forecasting growth at a 2.4 percent pace. The pickup, while welcome, isn't likely to be seen as a signal that the fragile economy is growing healthier. There are fears that as the bracing tonic of the tax rebates fades, the economy could be in for another rough patch later this year.

On Wall Street, the Dow Jones industrials were off nearly 75 points in morning trading following two days of gains.

The health of the economy is the top concern of the public — and by extension politicians including candidates vying for the White House.

GDP contracted by 0.2 percent, on an annualized basis, in the last three months of 2007, according to annual revisions released by the government.

That contraction reflected the deepest cuts in 26 years from builders clobbered by the housing slump and cautious spending by consumers spooked by all the fallout.

The fourth-quarter's dip marked the worst showing since the third quarter of 2001, when the economy was last in a recession. The government's previous estimate for the final quarter of last year was in positive territory — but not by much — at an anemic 0.6 percent growth rate.

GDP measures the value of all goods and services produced within the United States and is the best barometer of the country's economic fitness.

A pickup in consumer spending and brisk sales of U.S. exports abroad figured prominently in the second-quarter improvement.

Consumers boosted their spending at a 1.5 percent pace in the second quarter. That was up from a 0.9 percent growth rate in the first quarter and marked the best showing since the third quarter of 2007 when the economy was still performing strongly despite the severe housing slump.

Billions of dollars in tax rebates, the centerpiece of the government's $168 billion stimulus package, spurred consumers to spend in some areas, a major force shaping overall economic activity. Spending on furniture and household appliances went up, while people cut spending on cars.

Meanwhile, sales of U.S. exports grew at a 9.2 percent pace in the second quarter, up from a 5.1 percent growth rate in the first quarter. The weak dollar has made U.S. goods cheaper to foreign buyers, helping to bolster exports.

Government spending also helped second-quarter GDP.

The housing slump continued to take a bite — although a smaller one — out of overall economic activity.

Builders cut back on residential projects by 15.6 percent, on an annualized basis, in the second quarter. That was not as deep as the 25.1 percent cut made in the first quarter or the 27 percent annualized drop in the final quarter of 2007.

Businesses showed caution in other areas. They trimmed spending on equipment and software and they reduced investment in inventories in the second quarter.

An inflation gauge tied to the GDP report showed all prices galloping ahead at a rate of 4.2 percent in the second quarter, the fastest pace since the end of last year.

However, when energy and food costs are stripped out, all other — or "core" — prices rose at a pace of 2.1 percent, down from a 2.3 percent rise in the first quarter. Still, the second-quarter's core inflation reading is outside the Fed's comfort zone.

Given mounting inflation fears, the Fed in June halted a nearly yearlong campaign of rate cuts to shore up the economy. It is expected to hold rates steady again next week. Boosting them too soon to fend off inflation could hurt the economy and the already crippled housing market.

A trio of crises — housing, credit and financial — have badly bruised the economy. In response, employers have cut jobs for six months in a row, bringing total losses this year close to a staggering half-million — 438,000.

The Labor Department reported Thursday that layoffs rose sharply last week. New claims filed for unemployment insurance jumped to 448,000, the highest in five years.

The faltering labor market is keeping a lid on wage pressures. Wages and benefits paid to U.S. workers, meanwhile, rose a moderate 0.7 percent in the second quarter, the same growth as the prior quarter. It was the lowest in two years, the department said in another report.

With more job cuts expected for July and in coming months, there's growing concern that many people will pull back on their spending when the bracing effect of the tax rebates fades, dealing a blow to the shaky economy.

These worries — along with the negative GDP in the fourth quarter of last year — may rekindle recession fears.

There's been a lot of debate about whether the economy is on the brink of, or has fallen into, its first recession since 2001. Under one rough rule, if the economy contracts for two straight quarters it is considered to be in a recession.

However, that didn't happen in the last recession — in 2001. The unofficial determination, made by a panel of academics at the National Bureau of Economic Research, usually comes well after the fact. The panel takes into account economic activity, as well as employment, income and other things.

As part of the annual revisions, the government marked down growth in 2005, 2006 and 2007. Last year the economy grew by 2 percent, the weakest showing since 2002. The revisions are based on more information as well as improved methodologies.