In Sharp Contraction, Basis for an Upswing
Thursday, April 30, 2009
The U.S. economy contracted at a surprisingly fast pace at the beginning of the year, but it shrank in ways that could lay the groundwork for growth in the months ahead.
The 6.1 percent annual pace of decline in first-quarter gross domestic product followed an even sharper decline in the final months of 2008. Together, the two quarters marked the steepest six-month slide for the U.S. economy since Dwight D. Eisenhower's presidency.
The fine print of yesterday's report from the Commerce Department, however, offered more reason for hope. Household consumption, a measure of how much Americans are spending, rose. And businesses cut back sharply on their inventories. With fewer goods on shelves and in warehouses, and with demand from consumers stabilizing, companies will eventually have to crank up production again.
The Federal Reserve's policymaking committee, which sets key interest rates and thus can guide the economy, concluded a two-day meeting yesterday with a statement recognizing that "the pace of contraction appears to be somewhat slower" than it had been. The central bank declined to take any new action to stimulate the economy, leaving an important interest rate it controls near zero, in an effort to keep borrowing costs low and thus encourage spending.
Wall Street was buoyed by the positive signs. Stock market futures initially fell when the overall GDP number was released yesterday morning, but as analysts digested the details of the report, markets rallied, with the Standard & Poor's 500-stock index up 2.2 percent for the day.
"A month ago, people were still worried about the next Great Depression," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland. "Now there's a much more positive tone in society at large and in investors' minds."
Economists are hoping that the 2.2 percent annualized gain in consumer spending sets the stage for continued growth. But many acknowledge that gains could prove fleeting. The increase in consumption from January through March was driven partly by the boost from higher tax refunds.
Meanwhile, employers are still slashing jobs by epic proportions. According to Labor Department data released yesterday, the jobless rate rose steeply in most U.S. cities in March. One exception was the Washington region, where the rate edged down to 5.9 percent from February's 6.1 percent.
"I don't think consumers are ready to take their paycheck and go to the mall because I think they are going to be concerned about job losses even if they have a job," Standard & Poor's economist Beth Ann Bovino said. Or, as the Fed leaders put it in their statement, spending has shown signs of stabilizing but "remains constrained by ongoing job losses, lower housing wealth and tight credit."
Yesterday's GDP report suggested one other reason for optimism: Economic output was driven down in part by federal government spending, which fell at a 4 percent rate. That is expected to change. Government spending is sure to rise in coming months, as money rolls out from the stimulus bill passed in February. Just yesterday, Transportation Secretary Ray LaHood told Congress that $11 billion has been committed for road, bridge and environmental projects.
On the negative side of the nation's ledger, corporate America cut back dramatically in the first quarter, slashing investment in commercial buildings at a 44.2 percent rate and cutting investment in equipment and software by 33.8 percent. Those indicators suggest that many businesses are in no mood to bet on the future, a tendency that shows few signs of abating.
Both imports and exports plummeted, reflecting the dramatic falloff in world trade in recent months. But imports fell faster than exports, giving trade a net positive impact on GDP. That could change in months ahead as economies around the world contract sharply and buy fewer American goods.
And investment in housing continued its remarkably steep decline, falling at a 38 percent rate. So few new homes are being built that economists don't think that number can fall much further, and even if it does, housing has shrunk so much that it is now only 2.6 percent of total economic output.
In deciding not to take new action yesterday, the Fed was acknowledging that the economic outlook has improved some since its last meeting, in mid-March. But with its statement, the Fed simultaneously aimed to indicate that leaders of the central bank continue to view the economy as highly fragile and that they will take whatever steps they deem necessary to help it recover.
The nation's economic outlook has "improved modestly" since March, the policymaking Federal Open Market Committee said, but "economic activity is likely to remain weak for some time."
That matches the consensus of private economists. Even if consumer spending holds up, few analysts expect a powerful rebound anytime soon. Americans are still trying to extract themselves from a huge overhang of debt, a worsening job market and a troubled banking system.
"We're nowhere near being out of the woods, yet," said Bill Hampel, chief economist of the Credit Union National Association. "But this is a strong sign that things aren't going to get dramatically worse."