Economy running out of steam

WASHINGTON — The nation's economy shrank slightly at the end of 2007 and expanded at a weaker-than-expected 1.9 percent annual pace during the last three months, despite tax rebate checks aimed at propping up growth, the Commerce Department said Thursday.

"The basic pattern is clear. This is becoming a W-shaped recession," said David Wyss, chief economist for Standard & Poor's in New York.

The contraction evident in the fourth quarter of 2007, when the GDP fell at a 0.2 percent rate, "got interrupted by the rebate checks," Wyss added, but the economy "will go back to declining after people finish spending their checks."

Government tax rebates to consumers, federal and state government spending and surging exports were the main sparks to second-quarter growth, which eclipsed the sluggish 0.9 percent rate of the first three months of the year.

Commerce Secretary Carlos Gutierrez disputed the notion the stimulus checks already have made their impact. He expects them to continue to bump up consumer spending and thus domestic demand for goods and services.

And the 1.9 percent rate represented double the first quarter's growth, with some signs emerging that the economy may have bottomed out, notably growth in exports and business investment.

Export growth was the highlight of the second quarter, surging 9.2 percent after rising 5.1 percent in the first quarter. While exports have helped to offset the negative pull from the housing crisis, they're expected to slow as inflation and soaring energy prices brake the world economy.

Drags on the economy came from "the usual suspects": housing, residential investment and a drawdown in business inventories.

Inventories fell $62.2 billion, which means businesses were working their way through their stocks of goods and materials rather than buying more. That points to a likely rise in business spending later this year, which will spur growth.

"While we expect domestic demand to remain weak going forward, stabilizing inventories will likely provide some positive offset in the second half of the year," Bank of America economist Peter Kretzmer said in a note to investors.

Business spending will be key in the second half of this year because economists expect personal consumption to fall after the stimulus checks the government began sending in May have been spent.

"I think we have avoided a recession," White House Budget Director Jim Nussle told CNBC.

Rebates touted

Nussle and Council of Economic Advisers Chairman Edward Lazear both touted the effects of the stimulus package signed into law by President Bush.

Responding to a question about the need for a second such package, Nussle said such calls are "all about politics and the election."

Democratic presidential contender Sen. Barack Obama has called for a second stimulus package worth $50 billion. It would include more tax rebates, extend unemployment insurance and assist states hit by the housing crisis.

Separately, the Department of Labor said that more people filed initial claims for unemployment benefits last week than at any time in more than five years.

Many economists had predicted the economy would grow 2.3 percent during the April-through-June quarter because Washington was pumping out $100 billion in rebate checks.

Although the checks did have an effect, analysts said the pickup is not likely to be enough to keep the country from a renewed slump later in 2008.

But overall the performance was disappointing and boded poorly for the future, economists said.

"Whatever strength there was came from the tax rebates, from exports and from strong federal government spending," said Allen Sinai, chief economist at Decision Economics in New York.

Sinai said that except for continued strength in exports, there was little reason to expect the economy to hold up in the coming months.

Material from McClatchy News Service reporter Kevin G. Hall and MarketWatch reporter Robert Schroeder is included in this report.