---- by Christopher Anstey ----
WASHINGTON (AFX) - The risks of a recession in the US have become almost negligible, analysts concluded, after reviewing the second quarter GDP report.
"Any risk of recession is pretty much blown away -- it's almost negligible at this point," concluded Stephen Gallagher, director of economic research at Societe Generale in New York.
Economists particularly noted the large drop in inventories in the second quarter, which almost matched the pace of cutting back seen in the first quarter.
The Commerce Department earlier reported that US GDP rose 0.7 pct in the second quarter, following a 1.3 pct rise in the first quarter. Businesses subtracted 26.9 bln usd from inventories in the second quarter, compared with a 27.1 bln decline in the prior quarter.
With such a large decline in inventories for the first half, economists said the inventory correction is most likely past its worst, leaving the economy likely to strengthen in the second half. "Inventories recorded another sharp drop (and) that is quite positive -- it's going to set up a lot of businesses later this year (with a clean slate)," said Eric Green, economist at Paribas Capital Markets in New York.
"The correction is close to being over at this point," he said, concluding that "there is a very small risk of recession" now. On the negative side, economists noted that the report showed no sign of a bottom in the drop in business equipment investment, with spending on equipment and software plunging 14.5 pct in the quarter. Ian Shepherdson, economist at High Frequency Economics, said while this was a sharper drop than expected, it is still "not a huge shock". SocGen's Gallagher concluded that "if this is not already bringing about a recession, with large declines in inventories it (a recession) is unlikely to happen now."
Consumer spending also came in with a smaller rise than expected, analysts noted, with consumption rising 2.1 pct after a 3.0 pct rise in the first quarter.
Paribas' Green, however, noted that consumer spending should be buoyed by the 40 bln usd in tax rebate checks that are now starting to be mailed to taxpayers.
With the risk of a recession sharply reduced, SocGen's Gallagher said the debate over the US economic outlook is now likely to shift towards what shape the recovery will take.
"The question is one of sluggish growth, in the 1-2 pct range, or will the economy speed up to 2-3 pct growth?" he said.
"I don't think these data give us a view on that one way or the other," he added.
Wayne Ayers, chief economist at FleetBoston Financial, said the smallest rise in US GDP in eight years is likely to convince the Federal Open Market Committee of the need for further monetary easing. "Greenspan has all but guaranteed more easing at the next (FOMC) meeting, but to the extent he was facing opposition on the FOMC, this should bolster his case," Ayers said.