A Less Dismal First-Quarter GDP Report

Shrinkage Not as Severe as First Believed; Markets Finish Strong Three Months

The economy did not shrink as much as originally believed during the first quarter, according to a government report that helped Wall Street rebound from a rocky week and close the month in positive territory.

After yesterday's late-day rally, the blue-chip Dow Jones industrial average finished up 1.15 percent, or 96.53 points, at 8500.33. The broader Standard and Poor's 500-stock index was up 1.36 percent, or 12.31 points, to 919.14, and the tech-heavy Nasdaq composite index gained 1.29 percent, or 22.54 points, to 1774.33.

This marks the first time the Dow has had three consecutive months of gains since 2007, when stocks hit their peak. The Dow and S&P were up about 4 percent and 5 percent this month, while the Nasdaq climbed 3.6 percent. All are up more than 20 percent over the last three months, with the Nasdaq having climbed nearly 30 percent.

For the Dow this was also the best three-month percent gain since November 1998.

The springtime rally has been spurred by optimism that the economy is no longer in free fall. For example, stocks jumped earlier this week after an unexpectedly strong consumer confidence report. But the optimism has been moderated by concerns that investors were sprinting ahead of the recovery. A sell-off this week was driven by worries that there would not be enough buyers of government debt to fund recovery efforts.

Next week investors' resolve will be tested by a batch of potentially high-impact economic data, including monthly jobless figures and a detailed look at the manufacturing sector.

Yesterday, investors focused on economic data pointing to a slowdown in the economy's deterioration. The gross domestic product, the broadest measure of economic output, fell at a 5.7 percent annual rate from January to March, according to the Commerce Department. The government had initially estimated that the economy shrank at a 6.1 percent annual rate.

Even with the less-steep decline, the new data made clear that the economy remained basically in free fall at the start of the year, with plummeting business inventories, investment levels and exports. Analysts believe that the economy has continued shrinking in the second quarter, which ends June 30, but at a more manageable pace.

"All the incoming data suggest that the rate of decline in economic activity is decelerating," Nariman Behravesh, an economist with IHS Global Insight, said in a research note.

In the first quarter, businesses did not cut back on inventories quite as quickly as originally estimated, nor did exports fall as steeply, which boosted the revised number. The new data affirmed that consumer spending stabilized in the early months of the year, with personal consumption expenditures rising at a 1.5 percent annual rate.

The government, however, said that consumer spending on nondurable goods rose at a 9.6 percent annual rate, which is healthy but not as healthy as first estimated.

The data continued to show a near-collapse in business investment, with spending on equipment and software falling at a 33.5 percent annual rate, and investment in structures falling at a 42.3 percent rate. Those numbers continue, even after the revision, to support the idea that businesses are aggressively trimming their spending, unwilling to take any risk.

Corporate profits rose by $42.6 billion during the quarter, as companies cut costs aggressively. But that followed a $250 billion decline in profits in the final months of 2008.

Still, the data bolsters hopes that the economy will shrink by a smaller rate during the second quarter and perhaps break even during the third, said Phil Orlando, chief equity market strategist at Federated Investors in New York. "We believe we are establishing a trend here, things will continue to be positive," he said.

In other market news, General Motors stock fell 33 percent, to 75 cents a share, as the automaker inched closer to bankruptcy. Dell was up less than 1 percent, to $11.58 a share, after reporting that its profit tumbled 63 percent during the first quarter. And energy stocks rallied as crude oil prices remained at a six-month high, $66.31 a barrel.