The U.S. economy grew at a lethargic rate of just 0.2 percent, its weakest performance in eight years — but gross domestic product still managed to beat Wall Street economists' forecasts for a flat quarter.
The Commerce Department said second-quarter GDP grew at a slim revised annual rate of 0.2 percent — marking the weakest quarter for the economy since the first three months of 1993 when GDP shrank 0.1 percent.
GDP is the country's total output of goods and services and is considered the broadest measure of the economy's health.
But while the second-quarter figure was down from a previously reported 0.7 percent rate of growth and trailed the first quarter's 1.3 percent, it beat Wall Street economists' forecasts for a flat April-June quarter that could have sparked fears the economy was teetering on the edge of recession.
The new, lower estimate largely reflected businesses were doing a better job of working off excess inventories of unsold goods than previously estimated. While this process subtracts from GDP, economists say excess inventories must be whittled before companies can ramp up production, something that would bode well for economic growth down the road.
The new GDP figure underscores how dramatically the economy continued to weaken into the spring and marked the poorest showing in the country's yearlong economic slowdown.
The Bush administration and many private economists predict the second quarter will prove to be the point of maximum danger for the economy. The administration is counting on nearly $40 billion of tax rebate checks and the aggressive credit easing by the Federal Reserve to lift the economy to higher growth rates in the second half of this year.
To fight off a possible downturn, the Fed has slashed interest rates seven times this year, totaling 3 percentage points. The most recent cut, one-quarter point, came last week.
Some economists were worried that the revised GDP estimate for the second quarter would show that the economy either stalled or slipped into reverse, possibly signaling the start of the first recession in the United States in 11 years. A recession is usually defined as two consecutive quarters of shrinking GDP.
Many Economists Predict Q3 Rebound
However, many economists predict that the economy will rebound to around a 2 percent growth rate in the current quarter and to 3.5 percent in the fourth quarter.
One of the main reasons for the lower estimate of second-quarter GDP is that companies liquidated their inventories more than the government previously thought. Inventory reduction was valued at $38.4 billion in the second quarter, the biggest decline since the first quarter of 1983. That subtracted 0.4 percentage point from GDP.
Another reason for the downward revision was that the trade deficit was slightly worse because exports fell more than previously thought, reducing second quarter GDP by 0.3 percentage point.
Still, much of the overall weakness in the second quarter continued to come from companies cutting back sharply in their investment in plants and equipment, which had been a main source of strength driving the record expansion.
Battered by weak sales and plunging profits, U.S. companies reduced such investment in the second quarter at a rate of 14.6 percent, the worst showing since the second quarter of 1980. The new estimate was weaker than the 13.6 percent rate of decline previously estimated.
The reduction in spending on computers and software in the second quarter was an even sharper rate of 15.1 percent, versus the 14.5 percent rate of decline initially thought.
Spending on new factories and office buildings fell at rate of 13.4 percent.
Wednesday's report also showed after-tax profits of U.S. corporations fell by 2 percent in the second quarter, following a 7.8 percent decline in the first quarter.
Consumers were the major force keeping the country out of recession. Consumer spending, which accounts for two-thirds of total economic activity, rose at an annual rate of 2.5 percent in the second quarter, stronger than the 2.1 percent rate originally estimated.
Also helping was a 5.8 percent rate of increase in residential construction, a sector that has remained strong, helped by falling interest rates.
Meanwhile, a key inflation gauge tied to the GDP rose at a rate of just 1.6 percent in the second quarter, half the 3.2 percent rate in the first quarter.
Reuters and the Associated Press contributed to this report.