The economy sank at a 5.7 percent pace as the strength of the recession carried over into the start of this year, as measured by the Gross Domestic Product (GDP), which measures the value of all goods and services produced in the United States, is the best gauge of the nation’s economic health. The government makes three estimates of the economy’s performance for any given quarter. Each estimate of gross domestic product is based on more complete information. The third one will be released in late June.
The Commerce Department’s updated reading on gross domestic product, released Friday, showed the economy’s contraction from January to March was slightly less deep than the 6.1 percent annualized decline first estimated last month, with the new reading typically worse than economists were forecasting.
It was a poor first-quarter performance despite the small upgrade. It marked the second straight quarter where the economy took a huge tumble. At the end of last year, the economy shrank at a sharp 6.3 percent pace, the most in 25 years.
Weakness in the first quarter mostly reflected massive cuts in spending by businesses on home building, equipment and software and many other things. U.S. exports plunged, so did spending on commercial construction and inventories.
All of those reductions — as well cutbacks in government spending — more than swamped a slight rebound in consumer spending. However, consumers weren’t nearly as energetic as the government first estimated. They boosted spending at a 1.5 percent pace, according to the revised figures. That was less than the 2.2 percent growth rate estimated a month ago.
Less dramatic cuts by businesses factor into the expected improvement. Consumers, however, are likely to be cautious. There’s been encouraging signs recently with gains in orders for big-ticket manufactured goods, some firming in home sales, albeit at a sharply lower median sales price, and a slowing in the pace of layoffs.
It is likely, however, that any recovery will be lethargic and that unemployment — now at 8.9 percent, the highest in 25 years — will continue to march upward in the months ahead, probaby into double digits, at least ten percent by year’s end, if not higher.
In the first quarter, businesses slashed spending on home building by 38.7 percent on an annualized basis. That was slightly deeper than initially thought and was the biggest cut since the first quarter of 1980.
Spending by businesses on “nonresidential” investment, including commercial construction and equipment and software fell at an annualized rate of 36.9 percent in the first quarter. That was a bit less than the 37.9 percent annualized cut first estimated but still marked the biggest decrease on records going back to 1947.
Businesses also cut spending on inventories but not as much as the government initially thought. That shaved 2.34 percentage points off GDP, versus 2.79 percentage points first estimated. With inventories so lean, economists are hopeful that factories will have to bump up production so that businesses can replenish them. If so, that would aid economic activity.
Exports of goods and services dropped at an annualized rate of 28.7 percent in the first quarter. That was a huge drop but was a little less steep than the 30 percent annualized decline first estimated. Overseas demand for U.S. exports has been crimped as economic troubles in other countries force foreign buyers to cut back.
Cutbacks in auto production, meanwhile, shaved 1.36 percentage points off first-quarter GDP, underscoring the troubles of this struggling industry.