April 30, 2009

U.S. Economy in 2nd Straight Quarter of Steep Decline

By JACK HEALY and LOUIS UCHITELLE
The economy contracted sharply in the first quarter of the year as businesses scaled back on
investments and cut their stockpiles of unsold goods, the government reported on Wednesday. But
the numbers suggested that the worst of the recession may be fading as the government’s stimulus
filters into the economy.
The gross domestic product shrank at an annual rate of 6.1 percent from January through March
after a 6.3 percent decline in the fourth quarter of 2008. Not since 1958 have Americans
experienced such a sharp contraction over six months.
But on Wall Street, investors barely flinched at the worse-than-expected decline in economic output.
Stock markets rallied 2 percent in midday trading as two big media and entertainment companies
beat earnings expectations and analysts upgraded their outlook on bank profits.
Although economists expect the economy to shrink again in the current quarter, they said it would
do so at a slower pace and level off in the second half of the year as one of the longest downturns
since the 1930’s begins to lift.
“The 6.1 percent decline in the first quarter was very bad,” said Mark Zandi, chief economist at
Moody’s Economy.com. “But the situation is not nearly as dark as this number suggests. The details
suggest a more stable economy this summer.”
One of the bright spots in the numbers was a 2.2 percent increase in consumer spending, which
accounts for some 70 percent of economic activity. After two quarters of sharp declines, economists
said consumer spending had stabilized, thanks in part to lower energy prices and higher-than-
normal tax refunds, which have put more money in people’s pockets.
And economists said that government spending, which declined 4 percent, would probably turn
around and buoy the broader economy for the rest of the year as infrastructure projects from the
$787 billion stimulus plan get underway.
“This reads like the final blow-off quarter of the recession,” said Mickey Levy, chief economist at
Bank of America. “Things are going to begin to stabilize.” Other gauges of the economy are
beginning to show signs of healing.
Credit markets that spiraled out of control late last year are improving, and retail sales and orders by
manufacturers are no longer posting record declines. And on Tuesday, a closely watched gauge of
home prices in the United States leveled off by a hair, the first time in 16 months that the slide in
housing prices did not accelerate.
“We’re still declining, but we can see the forces that will get us out of this,” said Markus Schomer,
global economic strategist at A.I.G. Investments. “We still have this massive fiscal stimulus
coming. There are a lot of positives that are coming over the next six to 12 months that will drive
the recovery.”
Falling inventories and a plunge in business investment contributed to much of the overall decline
in the nation’s economic output in the first quarter.
Companies cut their capital investment at an annual rate of 38 percent, and cut their inventories at a
pace of $103.7 billion as they rushed to reduce their costs. Business investment in software and
equipment declined by an annualized 33.8 percent, and investment in new structures was down 44.2
percent.
“It was just a complete free-fall in investment activity,” said Joseph LaVorgna, chief United States
economist at Deutsche Bank.
But even if the economy is beginning to reach a bottom, millions of Americans are unlikely to see
their fortunes improve any time soon.
Economists warned that job losses are likely to continue through the rest of the year. The current
unemployment rate of 8.5 percent is expected to rise as high as 10 percent as businesses reduce their
costs and put off hiring, buckling down for more bad times.
Already, more than 5 million workers have lost their jobs since the recession began in December
2007. Businesses that began to cut costs with furloughs and pay freezes are laying off workers in
large numbers. Earlier this week, General Motors announced it would cut another 21,000 jobs in the
United States.
President Obama made the economy the centerpiece of his campaign for the White House, and he
has said that his stimulus package would save or create three million to four million jobs over the
next two years. Economists said the coming months would begin to put those promises to the test.
“‘I don’t think anyone’s going to be thrilled,” said Michael Moran, chief economist at Daiwa
Securities. “The unemployment rate is going to continue rising, and I think this soft labor market is
going to continue to give a disappointing tone to the economy.”