Thursday June 25, 04:08 PM
US economy contraction offers hope of rebound
By Rob Lever
WASHINGTON (AFP) - The US economy contracted at a 5.5 percent pace in the first quarter, the government said Thursday in a report offering a glimmer of hope for recovery from prolonged recession.
The Commerce Department's final estimate of gross domestic product (GDP) was not as bad as last month's estimate of a 5.7 percent annualized decline in output.
It still showed a dramatic decline on the heels of a 6.3 percent slide in the fourth quarter of 2008 -- the worst slump in decades.
The revision reflected a slightly better reading on consumer spending and lower imports, partly offset by declines in inventory and construction.
The figure was slightly better than the unrevised 5.7 percent drop expected by analysts, but economists point out that the reading of January-March activity offers few clues on current conditions.
Many expect a much smaller decline in the current quarter that ends June 30 and growth returning by the third or fourth quarter.
"The recession continues, but the rate of contraction in the second quarter should be much slower," said Augustine Faucher at Moody's Economy.com.
"The economy will contract less in the second quarter -- somewhere between 2.0 and 3.0 percent annualized -- be flat in the third quarter, and then start to expand at the end of the year."
Paul Ferley at RBC Capital Markets said the revisions "do not alter the near-term expectations for improving growth going forward."
The latest report showed consumer spending, the main driver of activity, rose 1.4 percent in the first quarter, rebounding from a decrease of 4.3 percent in the fourth.
Business investment outside the housing sector however plunged 37.3 percent with investment in equipment and software slumping 33.7 percent. The housing market showed major weakness persisting with a 38.8 percent drop.
Both exports and imports fell, but the decrease in imports provided a boost to GDP of 2.39 percentage points. The drop in exports was 30.6 percent while imports fell 36.4 percent.
A factor in the weak GDP was a drawdown in inventories, which analysts say means businesses may need to ramp up production in the coming months. Stripping out inventory adjustment, a measure of economic activity known as final sales showed a 3.3 percent decline.
The report came a day after the US Federal Reserve decided to hold steady on its near-zero interest rate policy and vast array of programs to stimulate the recession-ravaged economy. Analysts said the action appeared to signal confidence in an economic rebound.
The policymaking Federal Open Market Committee statement, which was similar to the one issued on April 29, said the economy remained weak but was showing signs of improvement.
"Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing," the panel said.
"Although economic activity is likely to remain weak for a time, the committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability."
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