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.