Data Shows Smaller GDP Contraction, More Job Loss

A day after the Federal Reserve expressed confidence in the economy, the government said new jobless claims rose by 15,000 to 627,000 last week. The market expected a decline, and stock futures fell ahead of the market’s open on Thursday. Unemployment affects many drivers of the economy — most importantly, consumer spending.

Uncertainty about when the economy will turn around, and how fast it will grow when it finally does, have made for a rocky market this month. The Dow Jones industrial average remains up 26.8 percent from its 12-year low hit on March 9, but is down nearly 500 points, or 5.7 percent, from the five-month high it reached on June 12.

Rising unemployment claims shouldn’t be surprising to investors, because unemployment usually continues to increase even when the economy is improving, said Arthur Hogan, chief market analyst at Jefferies & Co. But the jump in claims was nevertheless leading to some selling on Thursday, he said.

“Investors are really on guard here. We’re at a juncture where investors don’t know what the next 10 percent move is — whether it’s up or down,” Hogan said.

The Fed said on Wednesday that “sustainable economic growth” should gradually resume, and inflation will “remain subdued for some time.” The statement did little to reassure investors, though, causing stocks to give up gains and finish mixed. Some were hoping the central bank would articulate how it will curb inflation.

One piece of good news on Thursday was a slightly improved reading on gross domestic product. First-quarter GDP shrank 5.5 percent, the Commerce Department said, less than the previous estimate of 5.7 percent.

Before the market’s open, Dow futures fell 46, or 0.6 percent, to 8,210. Standard & Poor’s 500 index futures fell 7.10, or 0.8 percent, to 891, and Nasdaq 100 index futures fell 7.75, or 0.5 percent, to 1,439.5.

Asian markets rose, while European markets fell.

Government bond prices edged up after the economic data, and ahead of the last big Treasury auction of the week: $27 billion in seven-year notes.

Most auctions have been attracting solid demand so far this year, but investors are looking for signs of weakness. If demand wanes, the government will have to boost yields sharply to lure buyers. Treasury yields affect consumer borrowing rates.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, dipped to 3.67 percent from 3.69 percent late Wednesday.

In corporate news, Nike Inc. reported late Wednesday that its profit dropped in its fiscal fourth quarter on costs to cut jobs. Adjusted results beat Wall Street expectations, but the athletic footwear and apparel company said orders for the next several months are down significantly from last year.

Nike shares fell about 4 percent in premarket trading.

Hertz Global Holdings Inc. on Thursday predicted second-quarter and full-year earnings above Wall Street estimates, driving the rental car chain’s shares up about 9 percent in premarket trading.

Crude oil rose 9 cents to $68.76 a barrel in premarket trading on the New York Mercantile Exchange.

The dollar was mixed against other major currencies.

Overseas, Japan’s Nikkei stock average rose 2.2 percent. In afternoon trading, Britain’s FTSE 100 fell 1.1 percent, Germany’s DAX index fell 1.9 percent, and France’s CAC-40 fell 1.8 percent.
Meanwhile, the rebound in consumer spending was a little less energetic.

Consumers boosted their spending at a 1.4 percent, down from a 1.5 percent growth rate estimated last month. Still, it marked the strongest showing in nearly two years and a huge improvement from the fourth quarter when skittish consumers slashed spending by the most in nearly three decades.

All told, the report showed the economic damage inflicted by the recession, the longest since World War II. The worst financial crisis since the 1930s, a housing bust and hard-to-get credit have eaten into businesses’ sales and profits, forcing them to cut back production and jobs. In the final quarter of last year, the economy plunged at a 6.3 percent annualized pace, the most in a quarter-century.

Many analysts believe the economy isn’t sinking nearly as much now as the recession eases it grip on the country.

For the current April-June quarter, economists predict GDP is sinking at a pace of between 1 and 3 percent. But that’s not nearly as much as it had in the prior six months, the worst performance in 50 years. The government will release second-quarter results at the end of next month.

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

Federal Reserve Chairman Ben Bernanke predicts the recession, now the longest since World War II, will end later this year. President Barack Obama’s stimulus of tax cuts and increased government spending should provide some help, along with aggressive revival efforts by the Fed, including cutting a key bank lending rate to a record low near zero.

Many economists predict the economy will start growing again as soon as the third quarter, although the pace is likely to be plodding as economic recoveries after financial crises tend to be slow. That means unemployment will keep rising.

The nation’s unemployment rate hit a quarter-century peak of 9.4 percent last month and is likely to reach 10 percent by the year-end. The jobless rate could rise as high as 11 percent by the summer of 2010 before making a gradual descent, economists say. The highest rate since World War II was 10.8 percent at the end of 1982.

The Labor Department on Thursday said initial claims for jobless benefits rose last week by 15,000 to a seasonally adjusted 627,000. Economists expected a drop to 600,000, according to Thomson Reuters. Several states reported more claims than expected from teachers, cafeteria workers and other school employees, a department analyst said.

The number of people continuing to receive unemployment insurance rose by 29,000 to 6.74 million, slightly above analysts’ estimates of 6.7 million. The four-week average of claims, which smooths out fluctuations, was largely unchanged, at 616,750.

Economists expect the number of initial unemployment insurance claims, which reflects the level of layoffs, to slowly decline over the coming months as the economy bottoms out.

The outlook for a shaky job market, which is likely to hinder wage growth, translates into a cautious consumer, another reason any recovery will be subdued.

And other risks abound. Skyrocketing foreclosures, rising interest rates and a worse-than-expected credit and financial conditions could send the economy into another tailspin. Economists don’t think that is the most likely scenario, but it can’t be ruled out.

In the GDP report, businesses’ cuts to inventories ended up shaving off 2.20 percentage points from economic activity. That was less than the 2.34 percentage-point reduction previously reported and factored into the upward revision to first-quarter GDP.

Another helper: imports fell at an annualized pace of 36.4 percent, deeper than the 34.1 percent rate of decline previously estimated. That translated into a bigger boost to first-quarter GDP from trade. U.S. exports fell sharply but not as much as imports.

The government makes three estimates of the economy’s performance for any given quarter. Each estimate of gross domestic product, which measures the value of all goods and services produced within the U.S., is based on more complete information. The third one came Thursday.

6/25/2009 9:04 AM JEANNINE AVERSA AP Economics Writer WASHINGTON