The U.S. economy contracted violently again in the first quarter of the year as business investment declined at a record rate, the Commerce Department reported Wednesday.
Real gross domestic product _ the inflation-adjusted, seasonally adjusted value of all goods and services produced in the United States _ fell at a 6.1 percent annualized rate in the first quarter, nearly matching the 6.3 percent decline in the fourth quarter of 2008.
Despite the disastrous results, many economists said the report hinted that the worst of the declines may be over. The data on investment "have a capitulatory feel to them," said Stephen Stanley, chief economist for RBS Securities.
The two-quarter contraction was the worst in more than 50 years. Since 1947, the economy had never contracted by more than 5 percent for two consecutive quarters. With a 0.5 percent drop in the third quarter of 2008, it's the first time the economy has contracted for three consecutive quarters since 1975.
In the past four quarters, the economy has fallen 2.6 percent, the biggest year-over-year decline since 1982.
The big story for the first quarter was in the business sector, where firms halted new investments, and shed workers and inventories at a dizzying pace to bring down production and stockpiles to match the lower demand from U.S. and foreign markets.
"The traditional patterns of a business cycle are emerging," wrote John Silvia, chief economist for Wachovia. "After a sharp decline in demand in the fourth quarter we are now witnessing the inventory correction. Ahead is rising demand and recovery at a slower, but still positive, pace."
The 6.1 percent decline in GDP was larger than the 5.1 percent contraction expected by economists surveyed by MarketWatch. Economists expect a 2 percent decline in the current quarter, followed by a tepid 1 percent gain in the third quarter, as the massive stimulus from Congress and the Federal Reserve kicks in.
Although the decline in GDP in the first quarter was nearly as deep as in the fourth quarter, the report was more varied in tone, with some positives mixed with some record-setting declines. Much of the drop was due to a large inventory correction, which is helping to rebalance supply and demand and is setting the stage for at least a modest recovery.
The decline in inventories, while large, was less than expected, said economists for Bank of America's Merrill Lynch. "Businesses will need to slash far more inventories in the months to come."
Another economist said the adjustments are well along. "Businesses have not only cut back aggressively on inventories, but also on business fixed investment," wrote Harm Bandholz, economist for UniCredit Markets. "And the size of the declines suggests that the adjustments in these areas have largely been made during the last couple of months."
The boost in consumer spending probably isn't sustainable, said economists for RDQ Economics, but they still see stabilization in the second half of the year.
Final sales, which exclude inventories, fell at a 3.4 percent rate in the first quarter after plunging 6.2 percent in the fourth quarter. Consumer spending rebounded to rise 2.2 percent after dropping at a 4 percent annual pace in the previous two quarters.
Consumer spending added 1.5 percentage points to GDP.
Spending on durable goods rose 9.4 percent, spending on nondurable goods rose 1.3 percent, and spending on services increased 1.5 percent.
Despite the bump in spending, the savings rate rose to 4.2 percent, the most since 1998. Real disposable income rose 6.2 percent.
Business investments fell at a record 37.9 percent annual rate in the first quarter. Investments in structures dropped a record 44.2 percent, and investments in equipment and software fell at a 33.8 percent pace, the biggest drop since 1958. Business fixed investment subtracted 4.7 percentage points from growth.
Inventories declined by $103.7 billion. The change in inventories subtracted 2.8 percentage points from growth.
Investments in housing fell for the 13th consecutive quarter, dropping at a 38 percent annual rate, the largest decline since 1980. Residential investments subtracted 1.4 percentage points from growth.
Trade collapsed during the quarter. Exports fell 30 percent, the most in 40 years, reflecting the global recession that is hitting Europe, Japan and other trading partners even harder than the United States. Imports dropped 34.1 percent, the most in 34 years, as U.S. consumers and businesses stopped buying. Net exports added 2 percentage points to growth, however, as the trade gap narrowed.
Final sales to domestic purchasers _ a measure of domestic demand _ fell 5.1 percent after dropping 5.8 percent in the fourth quarter.
Government spending fell at a 3.9 percent annual pace, the largest drop in 13 years. Spending by state and local governments fell 3.9 percent, the most since 1981. Federal spending fell 4 percent, including a 6.2 percent drop in the volatile defense spending category. Government spending subtracted 0.8 percentage points from growth.
The price index for domestic purchases (prices paid by U.S. residents) fell 1 percent in the quarter. Consumer prices fell 1 percent, while core consumer prices (which exclude food and energy) rose 1.5 percent.
In current dollar terms, GDP fell 3.5 percent to at annual rate of $14.01 trillion.
(c) 2009, MarketWatch.com Inc. Source: McClatchy-Tribune Information Services.