Credit, Economy and Financial News
Economy Still Mired in Recession, But Consumer Spending Up
Although there was a welcome gain in consumer spending,
the U.S. economy still contracted at a significant pace in
the 1Q. In its initial estimate, the Commerce Department
said the nation’s gross domestic product shrank at a 6.1%
annual rate, following a 6.3% contraction in the 4Q, as
business inventories and exports declined sharply. The GDP
has now declined for three straight quarters for the first
time since 1974-75. In the latest report, the government
said business inventories plummeted by a record $103.7
billion in the 1Q, as companies worked to clear out stocks
of unsold goods in their warehouses. That sliced 2.79
percentage points from the overall GDP figure. Excluding
inventories, GDP contracted at a 3.4% annual rate. The drop
in inventories can be viewed favorably, as it suggests that
companies have gotten their inventories aligned with demand
and have reduced the stock of unsold merchandise. The hope
is that companies will soon have to start rebuilding
inventories, thus creating jobs and economic growth.
In addition, exports collapsed 30%, the biggest decline
since 1969, after dropping 23.6% in the 4Q. The decline in
exports shaved 4.06 percentage points from the GDP.
Investment by businesses fell a record 37.9% in the 1Q. On
the bright side, consumer spending, which accounts for over
two-thirds of U.S. economic activity, rose 2.2%, after
collapsing in the second half of last year. This was boosted
by a 9.4% jump in purchases of durable goods. The Commerce
Department said the government's $787 billion stimulus
package of spending and tax cuts, approved in February, had
little impact on the 1Q GDP. Part of the stimulus package is
designed to bolster state and local and government spending,
which fell at a 3.9% rate in the 1Q. It is expected that the
stimulus spending will impact the economy over the course of
the year.
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Date Last Updated: 04/30/2009
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