Economy shrinks at 6.1% pace in 1Q
Massive cutbacks by businesses and the biggest drop in U.S. exports in 40 years contributed to a 6.1% decline in the economy during the first quarter of the year, the government said Wednesday.
Still, consumer spending and the depleted state of business inventories offered signs of hope in the Commerce Department’s report on the nation’s gross domestic product, the sum of goods and services produced in the U.S.
Wall Street read the report positively. The Dow Jones industrial average jumped more than 2% to 8,185.73. Investors took heart in the report’s findings about an improved consumer outlook and low business inventories that could spark economic growth.
“The good news from the real GDP report is that the most severe phase of the recession is behind us,” said Brian Bethune, an economist with IHS Global Insight.
Businesses essentially went into a stall during the quarter, slashing the production of goods and cutting inventories by “a whopping” $104 billion, said Sung Won Sohn, an economist at Cal State Channel Islands in Camarillo.
“With lean inventories, production will be cranked up in order to restock the depleted shelves in coming months,” especially as consumers start to shop again, Sohn said.
Consumer spending, which Sohn called “the largest piston in the economic engine,” is no longer a drag and kept the economy from declining faster in the first quarter.
The 2.2% growth rate in consumer spending came after two consecutive quarterly declines and was the strongest in two years.
Sales of durable goods shot up by 9.4%, helped by heavy promotions by retailers, Sohn said. Take-home pay also increased by 6.2%, and that translated into better consumer spending. Sohn estimated that declining energy prices also helped, amounting to the equivalent of a $250-billion tax cut.
“The economy was not as soft as the GDP number indicated,” Sohn said.
Many economists had estimated that GDP would shrink by a smaller 5%.
Though the higher rate of decline was surprising, “we can easily blame it on Uncle Sam,” said Meny Grauman, an economist with CIBC World Markets Inc.
Grauman said government spending tumbled by an unexpected 3.9% and added an entire percentage point to the rate of economic decline.
Nonetheless, signs of economic weakness abound.
Exports, an important economic driver, fell by 30% in the first quarter. The meltdown of the auto industry subtracted about 1.4 percentage points from economic growth, according to the government report. Housing remains deep in a slump. Housing investment declined by 38%, Bethune said.
Though worse than many economists expected, the rate of decline in the overall economy from last year’s fourth quarter was still slightly below the 6.3% decrease logged during that quarter.
Though some economists noted signs of improvement hidden in the report, they said there would be little relief for job hunters in the coming months. The unemployment rate stands at 8.5% and is expected to reach into double digits later this year. Economists don’t expect improvement until well into next year.
The economy has shrunk by 3.3% since it peaked early last year, according to CIBC.
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