TOPICS > Economy

U.S. Economy Shrank 5.7% at Start of Year

BY Admin  May 29, 2009 at 11:25 AM EDT

Woman shopping; AP file photo

The Commerce Department’s updated reading on gross domestic
product, which measures total goods and services output within U.S. borders,
showed the economy’s contraction from January to March was slightly less than
the 6.1 percent annualized decline first estimated last month. But the new
reading was a bit worse than the 5.5 percent annualized drop economists were
forecasting.

U.S. economic output has declined for three straight
quarters for the first time since 1974-1975. In the last quarter of 2008, the
economy contracted at a staggering 6.3 percent pace, the most in a
quarter-century.

The economy’s performance over the last two quarters
underscored the grim toll the recession, which started in December 2007 and is
now the longest since World War II, has had on the country. Businesses have
trimmed spending and slashed 5.7 million jobs to survive. Financial firms have
taken huge losses on soured mortgages. Banks and other companies have been
forced out of business. Home foreclosures have soared.

The new figures mostly reflected massive cuts in spending by
businesses on home building, equipment and many other things.

Exports plunged 28.7 percent, the largest decline since the
fourth quarter of 1971, after dropping 23.6 percent in the fourth quarter. The
exports drop lopped off a record 3.86 percentage points from GDP.

Business inventories fell a record 36.9 percent, or $91.4
billion, after slipping by $25.8 billion in the fourth quarter. Last month, the
Commerce Department estimated the drop in inventories at a record $103.7
billion in the first quarter. Inventories subtracted 2.34 percentage points
from the overall GDP figure.

Excluding inventories, GDP contracted 3.4 percent, the
department said.

But housing reports this week raised hope that the sector,
at the heart of the 17-month old recession, was stabilizing.

After collapsing in the second half of 2008, consumer
spending, which accounts for over two-thirds of U.S. economic activity, rose
1.5 percent. That was slower than the 2.2 percent rate estimated by the
government last month.

Consumer spending was
lifted by a 9.6 percent leap in the consumption of durable goods, the biggest
advance since the first quarter of 2006. Motor vehicle output cut 1.36
percentage points from first-quarter economic activity, an improvement from the
2.01 percent subtraction in the fourth quarter.

The government makes three estimates of the economy’s
performance for any given quarter. Each estimate of GDP is based on more
complete information. The third one for the first quarter will be released in
late June.

Economists are hopeful that the economy isn’t shrinking
nearly as much in the April-to-June quarter as the recession eases its grip.
Forecasters at the National Association for Business Economics predict the
economy will contract at a 1.8 percent pace.

Other analysts think the economic decline could be steeper
– around a 3 percent pace. Some think it could be less — about a 1 percent
pace.

“The recession is easing. The second quarter is shaping
up to be a smaller decline of about 3.0 to 3.5 percent. It should be the last
of the negative quarters,” Christopher Low, chief economist at FTN
Financial in New York, told Reuters.

Federal Reserve Chairman Ben Bernanke and NABE forecasters
say the recession will end later this year, barring any fresh shocks to the
economy. NABE forecasters predict the economy could start growing again in the
third or fourth quarter.

President Barack Obama’s stimulus package along with
aggressive action by the Fed to spur lending should help revive the economy.

Still, both the Fed and private economists caution that any
recovery will be lethargic and that unemployment — currently standing at 8.9
percent, the highest in 25 years — will continue to march upward in the coming
months.

Many economists say the jobless rate will hit 10 percent by
the end of this year. Some say it could rise as high as 10.7 percent in the
second quarter of next year before making a slow descent.

One of the forces that plunged the country into a recession
was the financial crisis that struck with force last fall and was the worst
since the 1930s. Economists say recoveries after financial crises tend to be
slower.