The US economy has contracted less than analysts predicted in the second quarter, in a further sign that the country's recession could be coming to an end.

Gross domestic product - the measure of total economic output - sank at an annual rate of one per cent for the period, the US commerce department said on Thursday.

Economists had expected GDPto decline by 1.5 per cent for the second quarter, following a 6.4 per cent drop in the first.

The GDP figures came as the US labour department announced the number of US citizens making new applications for unemployment benefits fell by 10,000 to 570,000 last week.

"While the revisions to real GDP were small, they generally reinforce the view that economic activity will snap back in the current quarter," said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

Inventories cut

But while the data on Thursday was broadly positive, US stock prices and government bond prices fell on news that US firms had cut back their inventories.

The GDP report showed that businesses had reduced inventories more than predicted, with firms cutting their stocks of goods and materials by a record $159.2bn in the second quarter.

But when inventories were scrubbed from the total economic output figures, GDP actually showed a rise of 0.4 per cent – the first gain since the second quarter of 2008.

Many analysts have said that companies will soon begin to replenish their inventories to take advantage of rising demand for their products, amid a feeling that a US economic recovery is already under way.

"The economy should enjoy something of a rebound over the next couple of quarters, as inventories are restocked and pent-up demand is released," said Paul Ashworth, a senior US economist at Capital Economics in Toronto.

Pace of recovery

While inventories declined heavily in the second quarter, the loss was softened by a smaller-than-estimated drop in consumer spending.
 
Spending by consumers, which accounts for about 70 per cent of US economic activity, fell at a one per cent rate in the second quarter, according to the labour department.

A month ago the labour department estimated a drop of about 1.2 per cent in spending.

But although many analysts say that the US economy is beginning to stabilise, there are concerns that high unemployment could arrest the rate of a recovery.

"With consumers still crippled by credit restrictions, a legacy of high debts and high unemployment, that [growth] rebound will take much longer to develop into a truly sustainable recovery," Ashworth said.