GDP Marks Weakest Economic Performance in 8 Years

WASHINGTON – The U.S. economy turned in its weakest performance in eight years during the second quarter as businesses slashed spending on software and other investments and pared back bloated inventories, the government said on Friday.

The Commerce Department said gross domestic product, the broadest measure of the nation's economic health, increased at an inflation-adjusted annual rate of 0.7 percent in the April to June quarter. That followed a 1.3 percent gain in the first quarter, which was revised up slightly from a previously reported 1.2 percent increase.

The second-quarter GDP figure marked the economy's most lackluster showing since a 0.1 percent contraction in GDP in the first quarter of 1993.

``This is a relatively weak number,'' said Sadakichi Robbins, head of global fixed income trading at Julius Baer. ``Consumer spending, which has been a luminary of strength, was weaker than projected and business investment fell off the shelf.''

Bond prices gained on the report, pushing yields lower.

Private economists polled by Reuters thought GDP growth would come in slightly stronger, at 0.9 percent.

Even though growth in the recently ended quarter was anemic, the fact that GDP rose at all was in some ways good news. In recent months, some economists had feared the economy might have slipped into its first recession in 10 years. A recession is loosely defined as two straight quarters of falling GDP, so any decline in economic output would have been an ominous sign.

U.S. consumers, whose spending makes up two-thirds of GDP, have been the economic stalwarts. Their expenditures increased by 2.1 percent in the second quarter following a 3 percent gain in the first quarter.

An improved trade deficit helped to push the economy along as well.

But the business sector has hit hard times. Since the beginning of the year, companies have been reducing inventories to bring supplies of unsold cars, computers and other goods back into line with demand.

That process continued in the second quarter, with inventories falling $26.9 billion after a $27.1 billion decline in the first quarter. Inventories actually contributed positively to growth very slightly, however, since the latest inventory drop was smaller than the first-quarter decline.

But business fixed-investment plummeted 13.6 percent in the April to June period, the biggest drop in 19 years. It had fallen 0.2 percent in the first three months of the year.