The US economy continued to shrink in the second quarter, but the pace of contraction slowed as aggressive government spending started to loosen the grip of the longest recession on record.

US gross domestic product declined by an annualised rate of 1 per cent in the second quarter after plunging by a revised 6.4 per cent during the first three months of the year, according to official figures released on Friday.

While the contraction was much smaller than in the previous three quarters and slightly better than economists had expected, the data showed that the government stimulus and a slowdown in imports had cushioned the drop.

Consumer spending, which represents about a third of GDP and has traditionally been the engine of US growth, fell a much worse-than-expected 1.2 per cent as Americans continued to cut back in the face of rising unemployment and the falling value of their homes and investments.

President Barack Obama said he was “guardedly optimistic” about the numbers, but added: “I realise that none of this is much comfort to those Americans that are still out of work and struggling to make ends meet.”

The US Federal Reserve expects the economy to start growing again by the end of the year but thinks the unemployment rate – currently at 9.5 per cent – will remain high for years.

“As far as I’m concerned we won’t have a recovery as long as we stop losing jobs, and I will not rest until every American who wants a job can find one,” Mr Obama said.

But economists took heart from the figures. “This is how economies turn. At first you’re hit by a car, you get all kinds of broken bones so they put you in a cast. You take the cast off, but you’re still all black and blue,” said Marc Chandler, analyst at Brown Brothers Harriman.

“We’re still in very bad shape, but we’re healing.” 

Federal spending grew by 10.9 per cent compared with a drop of 4.3 per cent in the previous quarter, as the government’s $787bn (€550bn, £470bn) fiscal stimulus package filtered into the economy. Christina Romer, chairman of Mr Obama’s council of economic advisers, said the stimulus had probably added between 2 and 3 percentage points to GDP.

“So that gives you a sense of just how much worse this would have been, had it not been for the [stimulus bill] and, of course, all the others things that we and the Federal Reserve have done to try and rescue this economy,” she said.

Rapidly falling business inventories knocked 0.8 percentage points from GDP as companies shed a huge $141.1bn in stock, following a $113.9bn drop in the first quarter. But economists think this is a positive sign for future growth: as demand picks up, it should necessitate immediate production of new goods, which could spur longer hours for factory workers or even new hiring.

“This is a spring that is very tightly coiled,” said Joseph LaVorgna, chief US economist at Deutsche Bank. “There’s no question the economy’s recovering and things are looking up.”

Slashing of business investment has also started to moderate, from a near- 40 per cent drop in the first quarter to an 8.9 per cent decrease in the second.

The collapse of trade also eased, although imports continue to fall faster than exports. Imports fell by 15.1 per cent after plunging by 36.4 per cent in the first quarter, while exports were down by 7 per cent compared with a 29.9 per cent drop in the first three months of the year.

On Friday, the International Monetary Fund released its annual report on the state of the US economy. It predicted GDP would rise by a tepid 0.8 per cent next year.

“As a result of their increasingly strong and comprehensive policy measures, the sharp fall in economic output seems to be ending, and confidence in financial stability has strengthened,” the report said. “Nevertheless, with financial strains still elevated, the recovery is likely to be gradual, and risks are tilted to the downside.”

Copyright The Financial Times Limited 2009