Economy Shrinks More Than What Was Expected

The Commerce Department reports that the nation's economy shrank at 6.1 percent pace in the first quarter, worse than economists had expected. While consumer spending rebounded, businesses cut back sharply and U.S. exports saw their biggest drop in 40 years.

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RENEE MONTAGNE, host:

NPR's business news starts with the shrinking economy.

(Soundbite of music)

MONTAGNE: Hopes for a speedy economic recovery were dashed this morning when the Cmmerce Department released its latest numbers on economic growth. The government says gross domestic product, a key measure of an economy's size and health, decreased more than 6 percent in the first quarter of the year. To find out more, we've got NPR's Jim Zarroli on the line.

Good morning, Jim.

JIM ZARROLI: Hi, Renee.

MONTAGNE: Now, that number is more than many economists had expected. Still not as bad a number as the previous quarter's GDP declined, but why so much disappointment?

ZARROLI: Yeah, it's a bit better than it was in the fourth quarter, but really only a bit better. I mean, for all intents and purposes, the economy just didn't improve much at all during the first quarter. And that was disappointing. I mean, we're really at the point in this recession where people are looking for any sign they can find that things are starting to get better. It's the green shoots you hear about. So, you know, you'll have a - a report comes out on, like, on housing sales, for instance, and maybe it says, you know, oh, sales aren't falling quite as far as they - fast as they were last month. And people really seize on this.

And then you have the bears who say, well, wait a minute. You're jumping the gun. This recession isn't over yet. And really, the report that came out today bolsters the bears' case. It's really the worst six-month period since 1958 for the U.S. economy.

MONTAGNE: Why was this decline worse, though, than people expected? What are the elements of it?

ZARROLI: Well, the economy underperformed in a number of areas. Housing construction fell 38 percent. We've seen something of an increase in housing sales this year because people are working through the old inventory of houses, a lot of them distressed properties. But they aren't building new homes. You have businesses that are cutting spending on equipment and software, for instance, on commercial construction. You had a drop in government spending, which might have been something of a statistical fluke. It's sort of counterintuitive, given the government spending that's going on. That should improve as the stimulus spending begins to work its way through the economy.

You also had a big drop in exports. The only reason the trade figures weren't worse this time around was because imports dropped even more. But neither of those is especially good for the economy.

MONTAGNE: So were there any bright spots?

ZARROLI: There were some. And the biggest was - an important one was a surprising increase in consumer spending. It had fallen, I think, 4.3 percent in the last quarter of 2008. It was up 2.2 percent in the first three months of 2009. So people seem to be spending again. That's a good thing, because as you've probably heard many times, consumer spending is a really big part of the U.S. economy. Also - and this is a little bit harder to understand, perhaps -companies - we're seeing a drop in business inventories. In other words, companies have a lot of goods on their shelves. They haven't been able to sell them, and they're beginning to work their way through them. And when they do, they'll start making new products again, and that's when you'll start to see the economy pick up.

Working through inventories is usually a kind of precursor to an economic rebound. So that can be a good thing.

MONTAGNE: And Jim, the Federal Reserve is meeting today, can't hardly lower interest rates anymore. Is there anything that it - any move that it can make in light of this disappointing GDP report?

ZARROLI: No. It can't lower rates. But you're going to see a statement. People will be looking at that to try to get a sense of where Fed officials think the economy is going. Do they see any green shoots? Are they optimistic that, you know, some of the extraordinary measures that they have been pursuing in the past few months to get the economy moving are working. If they - if there's anything positive, people will respond to that. There could be something of a reaction in the financial markets.

MONTAGNE: Jim, thanks very much.

ZARROLI: You're welcome.

MONTAGNE: NPR's Jim Zarroli, speaking to us from New York.

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U.S. GDP Shrinks At 6.1 Percent Pace In 1st Quarter

The U.S. economy turned in a worse-than-expected performance in the first three months of the year, contracting at a 6.1 percent annual rate — far more than the 5 percent decline analysts had expected.

The Commerce Department report on Wednesday came on the same day that the Federal Reserve said it sees signs the recession could be easing. The Fed left its key interest rate, already at zero, unchanged.

The latest gross domestic product figure, which follows a 6.3 percent annualized contraction for the fourth quarter of 2008, underscores that the worst recession since the 1930s could be a long way from over.

GDP measures the total output of goods and services. The Commerce Department's advance report comes as President Obama marks his 100th day in office, a milestone that puts a spotlight on his handling of the recession, which began in December 2007.

The Commerce report showed that business inventories fell a record $103.7 billion in the first quarter, as businesses sought to get rid of unsold stock. The emptied warehouses slashed 2.79 percentage points from the overall GDP figure. Excluding inventories, GDP contracted 3.4 percent.

Widespread Weakness Overwhelms Consumer Rebound

The report also showed reductions in exports, home building, equipment and software. Consumer spending, however, was up 2.2 percent, its biggest gain in two years.

The sharp cuts underscore the toll the recession and the loss of some 5.1 million jobs have taken on the economy, despite the government's economic stimulus plan and the Federal Reserve's move to cut a key bank lending rate to a record low near zero.

The president is counting on his $787 billion stimulus of tax cuts and increased government spending on big public works projects to help bolster economic activity later this year.

The Federal Reserve said the stimulus and the financial rescue plan should gradually help restore economic activity. It issued a slightly less pessimistic statement than at its mid-March meeting, saying that while the economy continued to contract "the pace of contraction appears to be somewhat slower."

But the recent outbreak of the swine flu poses a new danger. If the flu stifles trade and forces consumers to cut back further, it would worsen the recession.

Before the flu outbreak, Bernanke said the recession could end this year if the government succeeds in stabilizing the shaky financial system and getting banks to lend again.

From NPR staff and wire reports

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