GNP, Jobless Figures Paint Pallid Picture : Economy: Second-quarter output fell 0.5%. New claims for unemployment jumped 36,000 in a week. They suggest that the recovery is even weaker than some thought.


The economy shrank at an annual rate of 0.5% during the second quarter, the Commerce Department reported Thursday, suggesting that the recovery has been even more anemic than generally assumed.

In a separate report that also cast doubt on the recovery’s strength, the Labor Department said the number of Americans filing new claims for unemployment benefits surged by 36,000 in mid-September, the biggest weekly increase in three months.

The government’s revised estimate of the gross national product--the nation’s total output of goods and services--was a sharp downgrading of an earlier, preliminary calculation that the economy declined at a 0.1% rate during the April-June quarter.

The Commerce Department also reported that before-tax corporate profits from current production, originally estimated to have risen 0.6% during the second quarter, actually fell by a like percentage. That means that they fell $1.6 billion instead of rising $1.6 billion.


Economists said the reports signal that the recovery that began earlier this year is proceeding at a far more sluggish pace than expected.

The latest figures “show a very conservative business community reluctant to increase production and unwilling to hire,” said analyst Roger Briner of DRI/McGraw Hill, a Lexington, Mass., forecasting firm. He noted that the increase in jobless claims is particularly worrisome.

“There is a risk here of a self-fulfilling prophecy of recession on the part of an ultra-conservative business community,” he said.

The Labor Department reported that initial claims for unemployment benefits jumped sharply in the second week of September to 439,000, a sign that businesses are still laying off.


Irwin L. Kellner, chief economist at Manufacturers Hanover in New York, said new claims had been expected to rise above the 402,000 level recorded in the first week of September because the Labor Day holiday reduced the days available for filing claims that week. But the number had been expected to increase by fewer than 15,000, not by more than 36,000, he said.

Kellner said the unexpectedly large increase indicates that the service sector, which accounts for more than 80% of jobs, is undergoing a massive restructuring. Service industries, he said, appear to be following the same quest for competitiveness that eliminated hundreds of thousands of manufacturing jobs in the 1980s.

“This started in banking and financial services, we’ve seen it in retail services, in airlines, and now in publishing and broadcasting,” Kellner said. “This means there will be long-term layoffs, and it explains why consumer confidence is so lousy. With four of every five jobs in services, it means more households are affected.”

Kellner noted that production of manufactured goods, in contrast, is reviving. “That means somebody out there is making some money, and some people are still spending,” he said.


For that reason, Kellner continued, the downward revision in second-quarter GNP “is not worrisome at all, because it lays the groundwork for a stronger rebound in the current quarter and at the end of the year.”

The downward revision in the gross national product shaved $5.2 billion from the economy’s annual rate of production, compared to the $1.1-billion decline estimated a month ago. The change was primarily attributable to the fact that manufacturers, still chary about increasing production and building up inventories of manufactured goods, allowed stocks in warehouses and storerooms to fall by $33.3 billion, or $5.6 billion more than estimated a month ago.

Economists, while uniformly gloomy about the decline in corporate profits and the stubborn persistence of unemployment, took the inventory reductions in stride. As a rule, rapidly depleting inventory is a necessary condition for a recessionary economy to hit bottom and start a recovery.

Other components of the GNP report had a more positive cast. Consumption rose at a relatively healthy annual rate of 2.5%, or $16.8 billion, only marginally below the 2.8% and $18.4 billion reported earlier.


Business investment in plant and capital equipment, earlier reported to have declined at a 1.8% rate, or $2.3 billion, is now estimated to have increased by 1.4%, or $1.7 billion. In the first quarter, when the recession was in full swing and when GNP declined at a 2.8% annual rate, investment crashed also, falling $22.6 billion, an annual rate of 16.3%.