Economy in U.S. Contracted at 6.1% Annual Rate in First Quarter
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By Bob Willis
April 29 (Bloomberg) -- The U.S. economy plunged again in the first quarter, capping its worst performance in five decades, reflecting a record slump in inventories and further declines in housing.
Gross domestic product dropped at a 6.1 percent annual pace, more than forecast, after contracting at a 6.3 percent rate in the last three months of 2008, the Commerce Department said today in Washington. The report, which marked the weakest six months since 1957-58, comes as Federal Reserve policy makers meet for a second day.
Smaller stockpiles may set the stage for a return to growth in the second half of the year amid signs Fed efforts to reduce borrowing costs and unclog lending are starting to pay off. The recession persisted even as lower gasoline prices and larger tax refunds helped bring an end to the worst slump in consumer spending in almost three decades.
``The economy is not out of the woods yet, but as inventory levels get brought down in line with sales, factory production may see a restart,'' Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said before the report.
The median forecast of 71 economists surveyed by Bloomberg News projected GDP, the sum of all goods and services produced, would shrink at a 4.7 percent pace. Estimates ranged from declines of 2.8 percent to 8 percent.
12-Month Drop
The world's largest economy shrank 2.6 percent in the first quarter compared with the same period a year earlier. Today's advance report on GDP is the first of three estimates on first- quarter growth.
Consumer spending, which accounts for about 70 percent of the economy, climbed at a 2.2 percent annual pace last quarter, the most in two years. Purchases dropped at an average 4.1 percent rate in the last half of 2008, the biggest slide since 1980.
Companies trimmed stockpiles at a $103.7 billion annual rate last quarter, the biggest drop since records began in 1947. Excluding the reduction, the economy would have contracted at a 3.4 percent pace.
``This is the combination you want for a turn in the economy -- better sales and an inventory correction,'' John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, said before the report.
Companies cut total spending, including equipment, software and construction projects, at a record 38 percent annual pace.
Residential construction also decreased at a 38 percent pace last quarter, the most since 1980.
Government Spending
One reason for the larger-than-projected decline in GDP was that government slashed spending at a 3.9 percent pace, the most since 1995. The drop reflected cutbacks in defense spending and the biggest decrease in state and local government outlays since 1981.
A smaller trade gap added 2 percentage points to growth last quarter. The deficit shrank as imports collapsed at a 34 percent annual pace, the most since 1975, which reflected the reduction in stockpiles.
Should the economy shrink again in the second quarter as projected by economists surveyed this month by Bloomberg, the recession that began in December 2007 would be the longest since the Great Depression.
Recent announcements by companies including General Motors Corp. indicate that will be the case. GM last week said it will idle 13 U.S. assembly plants for multiple weeks to trim production by 190,000 vehicles from May through July. Sales in its home market fell 49 percent this year through March.
Production Cuts
General Motors and Chrysler LLC are threatened with bankruptcy as sales have plummeted since credit markets seized last year.
Still, data in recent weeks, including signs of stability in home sales, residential construction and consumer confidence, signal the world's largest economy may shrink at a slower pace.
Part of the improvement may be due to government efforts to stem the recession. In its last meeting on March 18, the Fed pledged to double mortgage-debt purchases to $1.45 trillion and buy as much as $300 billion in long-term Treasuries. That's helped bring down rates on mortgages and auto loans.
The central bank's statement today, due at around 2:15 p.m., may acknowledge that the pace of economic decline has moderated in the past six weeks and may reiterate it will keep the benchmark rate low for an extended period and continue to boost its balance sheet to revive lending.
Inflation Low
The Fed's preferred measure of inflation, which tracks consumer spending and excludes food and fuel costs, rose at a 1.5 percent annual pace last quarter, toward the lower end of central bankers' longer-term forecasts.
Ford Motor Co., working to avoid a federal bailout, is among companies seeing some improvement. The automaker last week posted a first-quarter loss that beat analysts' estimates.
``We're not quite sure where the bottom is,'' Ford's Chief Executive Officer Alan Mulally said in an April 24 Bloomberg Television interview. ``But we believe with the stabilization of the banks, freeing up the credit, and the stimulus packages we have, both monetary and fiscal, that we're going to see an uptick in the third and fourth quarter.''
To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net
Last Updated: April 29, 2009 08:30 EDT
