6.1% GDP Plunge Dashes Economy Hopes

Source : The Business Times, April 30, 2009

LATEST US DATA

Consumer rebound in Q1 swamped by cutbacks elsewhere

(WASHINGTON) The US economy shrank at a worse than expected 6.1 per cent pace at the start of this year as sharp cutbacks by businesses and the biggest drop in US exports in 40 years overwhelmed a rebound in consumer spending.

The Commerce Department's report, released yesterday, dashed hopes that the recession's grip on the country loosened in the first quarter. Economists surveyed by Thomson Reuters expected a 5 per cent annualised decline.

Instead, the economy ended up performing nearly as bad as it had in the final three months of last year when it logged the worst slide in a quarter- century, contracting at a 6.3 per cent pace.

Nervous consumers played a prominent role in that dismal showing as they ratcheted back spending in the face of rising unemployment, falling home values and shrinking nest eggs.

In the January-March quarter, however, consumers came back to life, boosting their spending after two straight quarters of reductions. The 2.2 per cent growth rate was the strongest in two years.

Still, the consumer rebound was swamped by heavy spending cuts in virtually every other area.

Businesses cut spending on home building, commercial construction, equipment and software, and inventories of goods.

Sales of US goods to foreign buyers plunged as they retrenched in the face of economic troubles in their own countries. Even the government trimmed spending. It was the first time that happened since the end of 2005.

The sharp cuts underscore the toll that the housing, credit and financial crises - the worst since the 1930s - are having on the country. The recession, which began in December 2007, has taken a big bite out of national economic activity and snatched 5.1 million jobs.

To cushion the impact of the downturn, the Federal Reserve has slashed a key bank lending rate to a record low near zero and rolled out a string of radical programmes to spur lending. The Fed at the end of its two-day meeting yesterday is expected to keep its key rate near zero and probably hold it there well into next year.

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

The administration has also put forward programmes to rescue banks and curb home foreclosures - big negative forces weighing on the economy.

Before yesterday's weaker-than-expected report, many analysts were predicting that the economy would shrink less in the current April-June period - at a pace of one to 2.5 per cent - as Mr Obama's stimulus begins to take hold. Analysts also were hoping that the economy would start to grow again in the final quarter of this year.

However, the recent outbreak of the swine flu, which started out in Mexico and has spread to the US and elsewhere, poses a new potential danger. If the flu stifles trade and forces consumers to cut back further, those negative forces would worsen the recession.

Before the flu outbreak, Fed chairman Ben Bernanke said that the recession could end this year if the government succeeds in stabilising the shaky financial system and getting banks to lend again. -- AP