U.S. Economy: GDP Shrinks in Worst Slump in 50 Years (Update3)

By Bob Willis

April 29 (Bloomberg) — The U.S. economy plunged again in the first quarter, making this the worst recession in at least half a century.

Gross domestic product dropped at a 6.1 percent annual pace, weaker 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 reflected a record slump in inventories and further declines in housing, came hours before Federal Reserve officials said the economy continued to contract at a “somewhat slower” pace.

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 contraction 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.

“We are likely to emerge from this recession very slowly and the recovery will be very weak,” said Richard Berner, chief U.S. economist at Morgan Stanley in New York. “The aggressive policy response we have gotten will take time to work, but it will counter the still-strong headwinds holding the economy back.”

The Fed refrained from increasing purchases of Treasuries and mortgage securities, saying that the economy is showing some signs of stability. “Household spending has shown signs of stabilizing, but remains constrained by ongoing job losses, lower housing wealth and tight credit,” policy makers said in their policy statement. The target rate was unchanged near zero.

Stocks Rise

Stocks rose as more companies beat profit estimates and investors speculated bank losses peaked. The Standard & Poor’s 500 Index climbed 2.2 percent to close at 873.64. Treasuries dropped, pushing the yield on benchmark 10-year notes up to 3.09 percent at 4:16 p.m. in New York from 3.01 percent late yesterday.

“This is one of those good-bad numbers,” Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania, said in a Bloomberg Television interview. “Businesses are running about as lean as they possibly can be. It sets up the reality that any sort of increase in demand will cause firms to have to increase production.”

As a result, Naroff predicted growth won’t “be nearly as bad in the current quarter, and will probably be reasonably good.”

Deepening Slump

The world’s largest economy has shrunk 3.3 percent since peaking in last year’s second quarter, already making this the second-worst recession since the Great Depression. GDP shrank 3.8 percent during the 1957-58 contraction, according to figures from the Bureau of Economic Analysis.

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. Today’s advance report 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.

Part of the improvement may be due to government efforts to stem the recession. In its prior 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.

Return to Growth

“Most people are saying we could bottom out in the second half of the year, maybe in the third quarter, and then see positive growth again,” Christina Romer, the White House’s chief economist, said in a Bloomberg Television interview. “We’re certainly looking for some positive news towards the end of the year.”

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.

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.

Bush ‘Hangover’

“The hangover from the Bush administration is even worse than we thought,” Congresswoman Carolyn B. Maloney, chairman of the Joint Economic Committee, said in a statement. “These numbers reflect a drawdown in business inventories and continued weakness in the housing and commercial real estate markets. Americans are starting to spend more and I’m optimistic that we will begin to see the effects of the stimulus next quarter.”

President Barack Obama signed a $787 billion stimulus plan into law in February that included increases in spending on infrastructure projects and a reduction in taxes.

The economy is “leveling off at a low level” and doesn’t need a second fiscal stimulus package, former Fed Chairman Paul Volcker, one of Obama’s top economic advisers, said on Bloomberg Television’s “Conversations with Judy Woodruff” airing this weekend. In the recorded interview following the GDP report, he said the economy is functioning only “by the grace of government intervention.”

One reason for the larger-than-projected decline in GDP was that the government slashed spending at a 3.9 percent pace, the most since 1995. The drop reflected a cutback in defense spending and the biggest decrease in state and local government outlays since 1981, reflecting slumping tax revenue.

Production Cuts

Recent announcements by companies including General Motors Corp. indicate the economy will shrink again this quarter, albeit at a slower pace. 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.

Still, data in recent weeks, including signs of stability in home sales, residential construction and consumer confidence, signal the recession will ease.

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 16:18 EDT


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