WASHINGTON -- The U.S. economy remained stuck in recession instead of getting a little bit better in the second quarter as businesses continued to slash inventories, the Commerce Department said yesterday in a revised report.
Adjusted for inflation, gross national product edged down at an annual rate of 0.1% to mark the third consecutive quarterly decline. Last month, the department's advance estimate showed second-quarter GNP rose 0.4%.
Most economists said they still believe the economy is currently in recovery, but in a mild and tentative way that, along with other factors, is likely to induce Federal Reserve officials to lower short-term rates at least one more time. Those factors include low growth in the money supply, now below the Fed's target range, and diminishing inflation.
"The ability of the Fed to ease is there," said Mitchell Held, chief financial economist for Smith Barney, Harris Upham & Co. "They're just waiting for the right time to do it." Mr. Held said he expects to see a Fed move to lower rates sometime in September or early October.
"The economy is still in a very delicate position," said Lou Crandall, an analyst for R.H. Wrightson & Associates. "Manufacturers have not committed themselves to the kind of upturn in production that would sustain a recovery. While we're not predicting a double-dip recession, the economy could go either way."
Fed officials are likely to take out some insurance in the form of lower rates, but they do not want to get ahead of the market and need to see a long bond yield below 8% before they move, Mr. Crandall said.
The Commerce Department report showed that businesses chopped inventories at an annual rate of $27.7 billion, continuing the large-scale liquidation that began in the fourth quarter. That was $5.5 billion more than last month's estimate of $21.2 billion.
Economists say as businesses slow the pace of inventory liquidation, U.S. output stands to get at least a onetime kick in the current quarter. Mr. Held estimates real GNP will be up about 3% in the third quarter, with additional support from exports and consumer spending on services.
But other analysts say the consumer is still a big question mark for the economy. Weak income growth, high debt levels, and job losses in service-sector firms and in state and local government are making people uneasy and cautious about spending, said David Jones, chief economist for Aubrey G. Lanston & Co.
Personal spending increased 2.8% in the second quarter, the first gain in six months, the Commerce Department reported. However, all of the increase came in nondurable goods and services while spending on automobiles and other durable goods fell. Auto sales so far in July and August have remained poor, Mr. Jones said.
Other sectors of the economy were mixed, according to the Commerce Department report. Capital spending by business fell for the second quarter in a row, and the trade sector deteriorated as oil imports rose. Government purchases increased 3.0%, reversing a first-quarter decline, and residential investment rose 2.7%, the first gain in a year.
After-tax corporate profits fell 1.6% to an annual rate of $163.7 billion, the third consecutive quarterly decline and the lowest rate in two years.