Slump in economy is slowly abating

Gross domestic product shrank at a better-than-forecast 1 percent annual pace after a 6.4 percent drop the prior three months, Commerce Department figures showed yesterday in Washington. A survey of purchasing managers showed separately that business contracted less than estimated this month.

Stabilization in homebuilding and the liquidation of unsold goods sets the stage for gains in GDP starting this quarter, analysts said. At the same time, rising unemployment and weakening income growth threaten to erode household finances; the International Monetary Fund yesterday said policy makers must be ready to employ further stimulus if needed.

“We’re heading to a sluggish recovery,’’ said Nigel Gault, chief US economist at IHS Global Insight in Lexington, Mass. “We’ll get more support from government programs in the second half, but if you want a strong recovery you need a strong consumer, and we are not seeing that.’’

Stocks and treasuries gained and the dollar remained lower against the euro after the report. The Standard & Poor’s 500 Stock index rose 0.1 percent to 987.48 in New York, the highest closing level since Nov. 4.

Benchmark 10-year note yields fell to 3.48 percent at 4:33 p.m., from 3.61 percent late Thursday, and the dollar dropped to $1.4257 per euro.

The economy was forecast to shrink at a 1.5 percent pace, according to the median estimate of 78 economists surveyed by Bloomberg News.

Government spending rose at a 5.6 percent pace last quarter, the most since 2003, as President Obama’s $787 billion stimulus program began to take effect. The funds are aimed at helping states retain workers, financing infrastructure projects, and reducing tax payments.

Second-quarter profits reported by companies from Caterpillar Inc. to Dow Chemical Co. have reinforced signs the slump is coming to an end.

The Commerce Department’s figures yesterday, which included benchmark revisions to past years, showed that GDP has tumbled 3.9 percent since the second quarter of last year - the biggest drop since quarterly records began in 1947. GDP has fallen four straight quarters, the longest ever.