U.S. Economy Contracted at 5.7% Rate in First Quarter

--US economy shrank 5.7% in Q1, capping the worst 6-month performance in five decades --Narrower trade deficits and small decline in stockpile eased the GPD growth loss in Q1 --Consumer spent 1.5%, less than 2% forecasted --Reduction in stockpile, 91.4 bil, was the highest since 1947 By Bob Willis May 29 (Bloomberg) -- The U.S. economy shrank at a 5.7 percent annual pace in the first quarter, capping its worst six- month performance in five decades and reflecting declines in housing, inventories and business investment. The contraction in gross domestic product was smaller than the government estimated last month, revised figures from the Commerce Department showed today in Washington. The drop was larger than economists had forecast, and followed a 6.3 percent tumble in the last three months of 2008. The slowdown is forecast to ease this quarter, reflecting smaller declines in stockpiles of unsold goods and in construction, which may set the stage for a return to growth later this year. Still, companies are likely to continue cutting jobs as profits remain under pressure, causing consumers to limit spending and slowing any expansion. “The recession is gradually moderating, but the road to recovery will be difficult,” Ryan Sweet, a senior economist at Moody’s Economy.com in West Chester, Pennsylvania, said before the report. “The recession should end late this year.” Stock-index futures, which had risen earlier in the day, remained higher after the report, while Treasuries were little changed. Contracts on the Standard & Poor’s 500 Stock Index were up 0.6 percent at 910.30 as of 8:34 a.m. in New York and yields on benchmark 10-year notes were at 3.61 percent. Economists’ Forecasts The median forecast of 75 economists surveyed by Bloomberg News projected GDP, the sum of all goods and services produced, would shrink at a 5.5 percent pace. Estimates ranged from declines of 4.9 percent to 6.3 percent. The improvement from the 6.1 percent pace of contraction estimated last month reflected a narrower trade deficit and a smaller reduction in stockpiles than previously estimated. Today’s preliminary GDP report is the second of three estimates on first-quarter growth. Consumer spending rose at a 1.5 percent annual rate last quarter, less than previously estimated, after plunging at a 4.3 percent annual rate in the last three months of 2008, when it fell the most since 1980. Spending may falter again this quarter as job losses mount. Economists surveyed by Bloomberg forecast unemployment, currently at a 25-year high of 8.9 percent, may reach almost 10 percent by the end of the year. Auto Pain Firings in the auto industry, with Chrysler LLC already in bankruptcy and General Motors Corp. likely to follow next week, will probably depress the labor market in coming months. Commerce today revised down their estimate for wages and salaries in the fourth quarter as the job market deteriorated. Pay decreased by $21 billion in the last three months of 2008, $8.6 billion more than previously estimated. The update reflects more comprehensive figures from employer payrolls. Companies trimmed stockpiles at a $91.4 billion annual rate last quarter, the biggest drop since records began in 1947. Still, the decline was smaller than the $$103.7 billion estimated last month. Excluding the reduction, the economy would have contracted at a 3.4 percent pace. Reduced stockpiles raise the odds the economy will once again grow in the second half of the year as government stimulus measures and Federal Reserve efforts to reduce borrowing costs and unclog lending start to pay off. ‘More to Go’ “We still have more to go, but lean inventory positions can be a strong source of leverage for the economy once demand stabilizes and starts to grow again,” Russell Price, a senior economist at Ameriprise Advisor Services in Detroit, said before the report. Corporate profits, including estimates for the value of inventories and adjustments for capital investments, climbed 3.4 percent from the previous three months, the first gain in almost two years. United Technologies Corp., the maker of Otis elevators and Carrier air conditioners, is among companies seeing signs that government stimulus programs, particularly in China, may be starting to take hold. “China could be the first market to recover as we see government stimulus starting to take effect,” Chief Executive Officer Louis Chenevert said yesterday during a presentation at conference in New York. “Both Otis and Carrier have seen increased dialogue with builders and developers in China, only in the last few weeks. It’s still early to conclude” recovery is under way. Otis Sales Orders at Otis, the world’s biggest elevator maker, had been declining at a rate of 30 percent to 40 percent from a year earlier. The drops are now “smaller than this,” Chenevert said. Increasing demand from overseas means the trade gap may keep shrinking and help foster a recovery. The deficit shrank to $302.6 billion last quarter, adding 2.2 percentage points to GDP. Companies cut total spending, including equipment, software and construction projects, at a record 37 percent annual pace. Residential construction fell at a 39 percent pace last quarter, the most since 1980. Government spending fell at a 3.5 percent pace, the most since 1995. The drop reflected cutbacks in defense spending and the biggest decrease in state and local government outlays since 1981. To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net