Hopeful Signs Seen in GDP Fall

By SUDEEP REDDY The U.S. economy contracted sharply in the first quarter, capping its worst six-month performance in 51 years, the government said Wednesday. But a large decline in inventories and an uptick in consumer spending suggest the economy is inching closer to the day when it resumes growing. The Federal Reserve, meanwhile, signaled it will keep its foot on the accelerator by holding official interest rates low and continuing to buy up government bonds and other debt, in an effort to pump credit into banks and companies. The U.S. economy contracts 6.1% in the first quarter, a greater drop than expected. But as WSJ's Kelly Evans tells colleague Phil Izzo, although the numbers look bad, there are some positives. The Fed statement triggered a fall in bond prices, pushing the yield on a 10-year note up almost a tenth of a percentage point to 3.1%, a five-month high, a sign that some investors were disappointed Fed didn't unveil more aggressive plans to buy Treasurys. The economic data cheered stock investors. The Dow Jones Industrial Average closed up 168.78 points, or 2.1%, to 8185.73, its highest finish since Feb. 9. The gross domestic product shrank at an inflation-adjusted 6.1% annual rate in the first quarter, nearly matching the 6.3% decline in the fourth quarter. Home building continued to drop. Business investment plunged, as did exports. This recession marks the first time since 1954 that the U.S. economy has contracted for three quarters in a row. But in more favorable signs, firms drew down inventories at the fastest pace since the start of the decade. That could lead manufacturers to ramp up production as demand revives. And consumer spending rose, reversing a fourth-quarter decline. "We think we're moving toward stabilization in the economy," said Joseph Brusuelas of Moody's Economy.com. Excluding the drop in inventories, ultimate demand in the economy fell at a 3.4% annual rate -- much less than the 6.2% fall in the fourth quarter. The latest forecasts see the economy slipping this quarter, but at a slower 2% to 3.5%. The Fed, ending a two-day meeting, kept interest rates unchanged. It noted that "the economic outlook has improved modestly" since March, but added that "economic activity is likely to remain weak for a time." The central bank offered no hint of pulling back from its aggressive stimulus efforts. Write to Sudeep Reddy at sudeep.reddy@wsj.com