Second quarter GDP better than expected on third revision

09/30/2009 9:05 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Third time is the charm, apparently.

U.S, real GDP fell at an annualized rate of 0.7% in the second quarter, according to this morning's data release from the Commerce Department. The figure was the regular third revision of quarterly data.

And it surprised economists and likely the stock market too. The second revision had put the drop in second quarter economic activity at an annualized 1%. The consensus among economists was that the third revision would take growth down a bit further to a 1.2% decline.

Why did the third revision say the economy was doing better than earlier figures?

The main difference--and there's not a lot of difference let's be honest between an economy contracting at a 1% annual rate and one contracting at a 0.7% annual rate--came from figures showing that business investment had declined less than in the earlier  version of the numbers and that government spending had been slightly higher.

Corporate profits moved in the opposite direction with the revision showing a 3.7% quarter to quarter increase instead of the 5.7% increase shown by the second revision.

This report will be seen as support for the consensus view among economists that the economy will grow at a 2.6% rate in the second half of the year.

The drop in GDP was the fourth quarterly drop in a row. That's the longest string of quarterly contractions since the start of quarterly records in 1947. The drop since the second quarter of 2008 is 3.8%. That makes this the deepest recession since the 1930s.

One piece of data that worries me: Government spending climbed by 6.7% in the quarter according to these revised figures. That's exactly what you'd expect as the stimulus package works its way into the economy. That spending, however, ends in 2010. With consumer spending down 0.9% in the quarter, it's still an open question, in my mind anyway, whether or not we're seeing a sustainable recovery that will keep the economy chugging after the stimulus spending ends.

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