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Business

GDP fell 6.1% in Q1 2009

Latest update : 2009-04-29

According to the US Commerce Department, the country's GDP fell by 6.1% in the first quarter of 2009, more than expected. It was hit by falling exports, declines in business and household investment and a weak housing market.

AFP - The US economy slid at a 6.1 percent pace in the first quarter as plunging business investment offset improved consumer spending, official data showed Wednesday.

The Commerce Department's first estimate of gross domestic product (GDP) disappointed forecasters expecting a 4.7 percent annual rate of decline, and marked only a marginal improvement over the 6.3 percent drop in the fourth quarter of 2008.

The decline marked a third consecutive quarter of contraction for the world's biggest economy, which had not occurred since 1974-1975. But some analysts cited hopeful signs in the bleak report.

The steep GDP drop was the result of falling exports, declines in business and household investment and a weak housing market, offset in part by surprisingly strong consumer spending.

Consumers rebounded in the quarter, boosting spending 2.2 percent after a 4.3 percent plunge in the last quarter of 2008.

Even though consumer activity makes up the lion's share of activity, the rise was not enough to offset hefty declines in other segments of the economy, but sparked some optimism.

"There were some major positives" in the report, said Augustine Faucher at Moody's Economy.com, who argued that the data "points to an end to the recession by late 2009."

Some analysts pointed out that GDP was dragged down by massive declines in inventory stockpiling, which could mean businesses will need to ramp up production over the rest of 2009.

Subtracting inventories, the economy contracted at a 3.4 percent pace in a measurement known as real final sales.

Faucher said businesses "will quickly need to increase production" to keep up with consumer demand and that government spending "will start adding to growth as the stimulus package kicks in."

Cary Leahey, senior economist at Decision Economics, said that while the report was worse than expected, "it isn't necessarily bad news for the remainder of the year."

Leahey said that with consumer spending and the housing sector appearing to stabilize in early 2009, "that means the worst of the recession is behind us."

The report showed investment in housing or residential structures fell 38.0 percent and spending on nonresidential business investment slumped 37.9 percent, including a 33.8 percent drop in software and equipment.

Exports tumbled 30 percent and even government investment fell 4.0 percent.

Scott Brown, chief economist at Raymond James & Associates, said the report is consistent with an economy that is struggling to come out of a punishing recession.

"We're seeing the worst part of the decline in some sectors behind us," he said.

"There is hope for a bottom and a gradual recovery into next year."

Others were more cautious.

"Our opinion is that not too much should be read into the apparent consumer strength," said analysts at Briefing.com. "Unemployment is going higher, wage gains are limited, and credit remains constrained."

The report showed consumer prices overall fell 1.0 percent after a 3.9 percent decrease in the fourth quarter. Excluding food and energy, prices rose 1.4 percent in the first three months of the year.

The report comes as the Federal Reserve was set to conclude a two-day meeting widely expected to keep boosting the supply of cheap credit to support a struggling economy.

The Federal Open Market Committee (FOMC) meeting comes amid comments from some central bank officials that the recession is likely to ease later this year.

Analysts say this week's meeting is likely to signal no change in policy since the FOMC March gathering, when the Fed added over one trillion dollars to its arsenal to fight the economic crisis and maintained a base rate of zero to 0.25 percent.

Date created : 2009-04-29

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