http://www.reuters.com/article/ousiv/idUSN2730339820090827

Economy shrinks less, jobless claims fall

Lucia Mutikani

WASHINGTON (Reuters) - The U.S. economy shrank less than expected in the second quarter, despite a record drop in inventories, and fewer workers filed new claims for jobless benefits last week, a sign the economy was starting to heal.

Gross domestic product fell at a 1.0 percent annual rate, unchanged from an estimate last month, the Commerce Department said on Thursday. Economists had expected a steeper 1.5 percent drop after a 6.4 percent collapse in the first quarter.

"Everything around the data indicates that we are in a normal recovery out of a deep recession. The recovery probably started this summer," said Brett D'Arcy, chief investment officer at CBIZ Wealth Management in San Diego, California.

The U.S. economy appears to be emerging from its longest and deepest recession since the Great Depression of the 1930s.

The fairly positive data had little impact on the U.S. stock market, whose direction was determined by changes in the oil price. For more on stocks, see. U.S. government bond prices fell, despite a solid auction.

The GDP report showed businesses were more aggressive in reducing inventories than previously thought.

Business inventories dropped a record $159.2 billion in the second quarter, more than the $141.1 billion estimated last month. Stripping out inventories, GDP rose 0.4 percent -- the first gain since the second quarter of 2008.

Analysts said the sharp drawdown in inventories in the face of weak demand had likely run its course, and that the lean level of stocks would provide a springboard for an economic recovery many believe is already under way.

REBOUND EXPECTED

"The economy should enjoy something of a rebound over the next couple of quarters, as inventories are restocked and pent-up demand is released," said Paul Ashworth, a senior U.S. economist at Capital Economics in Toronto.

Richmond Federal Reserve Bank President Jeffrey Lacker on Thursday said "the economy appears to have leveled out and ... we can look forward to better times ahead." [ID:nN27310408]

The blow from the sharp inventory decline was softened by a smaller-than-initially-estimated drop in consumer spending, which accounts for about 70 percent of U.S. economic activity.

Consumer spending fell at a 1.0 percent rate in the second quarter. A month ago the department estimated it had dropped 1.2 percent.

With unemployment high and rising, there are fears weak consumer spending will restrain the recovery's momentum.

Wage and salary disbursements fell $235.7 billion in the first quarter, $31.1 billion more than previously thought.

"With consumers still crippled by credit restrictions, a legacy of high debts and high unemployment, that rebound (in growth) will take much longer to develop into a truly sustainable recovery," said Capital Economics' Ashworth.

Drops in exports and homebuilding that were not as steep as previously estimated also helped minimize the decline in GDP.

Doubts over the strength of the recovery have left companies reluctant to start hiring workers, though the pace of layoffs has slowed significantly.

The number of workers still on the jobless benefits rolls after claiming an initial week of aid fell to 6.13 million in the week ended August 15 from 6.25 million in the prior week, the Labor Department said. It was the lowest level of so-called continued claims since the week ending April 4.

"There are some signs of stability in the labor market. The big drop on the inventory suggests that the inventory burn is finished so production is going to stabilize. The labor market is bottoming out," said Nick Kalivas, vice president of financial research at MF Global in Chicago.

The GDP report showed after-tax corporate profits rose 2.9 percent in the second quarter, reflecting aggressive cost cutting by businesses, after gaining 1.3 percent in the first three months of the year.

(Additional reporting by Lisa Lambert and Mark Felsenthal; Editing by James Dalgleish)

© Thomson Reuters 2009 All rights reserved

Personal comment : I've highlighted the charaters in bold as i believe those comments suggest positive rebound for the markets ahead and especialy for commodities as well as precious metals .

The inventories numbers preclude to a rise in most commodities as industries will need to resume production and scale up inventories at least to a small measure .

The fall in bonds prices suggest the bond market may not be seen so much as a refuge as the economy show signs of improving and investors return to the stock market .

The weakness of the $US also suggest investors will remain cautious and look to precious metals as a measure of refuge with a higher return then bonds in med to long term .

I'm not suggesting we're out of this recession , surely not for a long time to come but the fears are easing as the world wide stimulus packages have improved the outlook for the short and med term and all this bodes well for the stock markets and commodities.

As for silver it's doubly positive as it stands to gain on both front as a industrial commodities and a hedge on the US dollar . WE might see it's ratio to gold price reduce in the coming months even as gold price increase .

Tec