The economy has now contracted for a record four straight quarters for the first time on records dating to 1947. That underscores the grim toll of the recession on consumers and companies.
Many economists were predicting a slightly bigger 1.5 percent annualized contraction in second-quarter GDP. It's the total value of all goods and services -- such as cars and clothes and makeup and machinery -- produced within the United States and is the best barometer of the country's economic health.
"The recession looks to have largely bottomed in the spring," said Joel Naroff, president of Naroff Economic Advisors. "Businesses have made most of the adjustments they needed to make, and that will set up the economy to resume growing in the summer," he predicted.
Less drastic spending cuts by businesses, a resumption of spending by federal and local governments and an improved trade picture were key forces behind the better performance. Consumers, though, pulled back. Rising unemployment, shrunken nest eggs and lower home values have weighed down their spending.
A key area where businesses ended up cutting more deeply in the spring was inventories. They slashed spending at a record pace of $141.1 billion. There was a silver lining to that, though: With inventories at rock-bottom, businesses may need to ramp up production to satisfy customer demand. That would give a boost to the economy in the current quarter.
The Commerce Department also reported Friday that the recession inflicted even more damage on the economy last year than the government had previously thought. In revisions that date back to the Great Depression, it now estimates that the economy grew just 0.4 percent in 2008. That's much weaker than the 1.1 percent growth the government had earlier calculated.
"The GDP revealed that the recession we faced when I took office was even deeper than anyone thought at the time," President Barack Obama said. "But the GDP also revealed that in the last few months, the economy has done measurably better than we had thought, better than expected."
Also Friday, the government reported that employment compensation for U.S. workers has grown over the past 12 months by the lowest amount on record, reflecting the severe recession that has gripped the country.
Separately, the International Monetary Fund said in a report that a U.S. economic recovery "is likely to be gradual" and that growth could be sluggish "for a considerable period."
The report, part of an annual IMF review of the U.S. economy, credited the government's "strong and comprehensive policy measures," including the bank rescue efforts and stimulus package, for ending "the sharp fall in economic output."
Stocks rose modestly in mid-afternoon trading. The Dow Jones industrial average gained about 46 points, or 0.5 percent, and broader stock averages also increased.
Federal Reserve Chairman Ben Bernanke has said he thinks the recession will end later this year. And many analysts think the economy will start to grow again -- perhaps at around a 1.5 percent pace -- in the July-to-September quarter. That would be anemic growth by historical measures, but it would signal that the downturn has ended.
Naroff said he now thinks growth in the third quarter could turn out to be much stronger because companies will need to replenish bare-bone stockpiles of goods.
"You could get a huge swing in inventories that could create a much bigger growth rate than anybody expects," he said.
If that were to happen, it's possible the economy's growth could clock in around 4 percent in the current quarter, he said.
Obama's stimulus package of tax cuts and increased government spending provided some support to second-quarter economic activity. But it will have more impact through the second half of this year and will carry a bigger punch in 2010, economists said.
Even if the recession ends later this year, the job market will remain weak. Companies are expected to keep cutting payroll through the rest of this year, but analysts say monthly job losses likely will continue to narrow.
Still, unemployment -- now at a 26-year high of 9.5 percent -- will keep rising. The Fed says it will top 10 percent at the end of this year. Businesses will be unlikely to boost hiring until they're certain the recovery has staying power.
In the second quarter, businesses continued to cut all kinds of spending, but not nearly as much as they had been, one of the reasons the economy didn't contract as much.
For instance, they trimmed spending on equipment and software at a 9 percent pace in the second quarter, compared with an annualized drop of 36.4 percent in the first quarter. Similarly, they cut spending on plants, office buildings and other commercial construction at a rate of 8.9 percent, an improvement from the annualized drop of 43.6 percent in the first quarter.
Housing -- which led the country into recession -- continued to be a drag on the economy. Builders cut spending at a rate of 29.3 percent, also an improvement from the 38.2 percent annualized drop reported in the first quarter.
Consumers, meanwhile, did a slight retreat in the spring.
They sliced spending at a rate of 1.2 percent in the second quarter, after nudging up purchases at a 0.6 percent pace in the first quarter. It turns out consumers didn't have nearly the appetite to spend in the first quarter as the government previously thought, according to the revisions released Friday.
In large part, that's because wages and salaries were revised much lower in the first quarter. They totaled $6.339 trillion annualized, down from the old estimate of $6.495 trillion -- a huge drop of $156 billion.
With consumers spending less on everything from cars to clothes, Americans' savings rate rose sharply -- to 5.2 percent in the second quarter, the highest since 1998.
One of the wild cards in the shape of the recovery will be how consumers behave in the months ahead. Their spending accounts for the single-largest chunk of economic activity.
A return to spending by governments helped economic activity in the spring. The federal government boosted spending at pace of 10.9 percent, the most since the third quarter of 2008. And state and local governments increased spending at a pace of 2.4 percent, the most since the second quarter of 2007.
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