The new GDP figures are of interest for what they say about the second quarter, and for what they say about the shape of the recession. The data are consistent with an economy bottoming out in midyear and generating weak positive growth in the second half—but not enough to prevent employment from continuing to fall.

The accounts have undergone a comprehensive revision—meaning that all historical data were subject to revision. On a technical note, the reference year for the accounts is now 2005, rather than 2000.

The decline in GDP in the second quarter, at 1.0%, was better than we had feared last month (-2.1%), but close to our expectation going into today's report (-1.1%), since data over the past month have been more upbeat than we expected. The second-quarter decline was much shallower than the 6.4% plunge in the first quarter.

Key points for the second quarter:

• Business fixed investment and exports declined much less steeply than in the first quarter
• Government spending bounced higher, probably in part due to the stimulus package, although the biggest contributor was a sharp rise in defense spending, which is often volatile.
• Inventories fell more sharply than in the first quarter, but placed a smaller drag on growth.
• Foreign trade boosted growth as imports fell faster than exports. Some of the import decline reflects the big drop in inventories.
• Consumer spending was the big disappointment, falling 1.2%, after a small 0.6% increase in the first quarter.
• Inflation was near zero. The GDP price index rose 0.2%.

Key features of the historical revisions:

• The recession is deeper than previously thought. The decline in real GDP from its peak (the second quarter of 2008) stands at 3.9%, which is the most severe drop in postwar history. Prior to the report, we had projected a peak-to-trough decline of 3.5%.
• Real GDP rose just 0.4% in calendar 2008, rather than rising 1.1% as previously announced.
• Consumer spending declined 0.2% in calendar 2008, instead of rising 0.2% as previously announced.
• Historical data for the saving rate have been revised up. The saving rate in 2008 was 2.7%, rather than 1.8%. Previous years were also revised up. However, the saving rate for the first half of 2009 is lower than it had previously appeared, because personal incomes have taken a bigger hit than previously thought, not good news for future spending prospects.

The second-quarter national accounts figures are consistent with a return to positive, but modest, growth during the second half of 2009. Exports and business equipment spending are beginning to stabilize, as is housing activity. There will also be some help from government stimulus spending (although defense will not keep boosting growth as it did in the second quarter). The inventory cycle will begin to turn, as inventories fall less rapidly—meaning that inventories will become a plus rather than a minus for growth. Some of the inventory swing will simply mean more imports, though, rather than more GDP.

Trouble spots remain, however. Business construction spending has much further to fall and, most importantly, the consumer is still struggling, worried about employment and income prospects. As a result, the recovery is likely to be a gradual one. Our July forecast showed a 0.9% average rate of growth in the third and fourth quarters, and we expect our August forecast to show something similar, with the risks marginally to the upside.