U.S. GDP declined 5.5% in Q1, rate of descent slows

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Investors may want to evaluate the final Q1 U.S. Gross Domestic Product report this way: The worst is over.

The U.S. economy has just registered its worst two-quarter performance in two years, including a 5.5 percent GDP decline in Q1, with businesses cutting back on investment at a very fast pace, the U.S. Commerce Department announced Thursday. The economy also contracted 6.3 percent in Q4 2008.

A Bloomberg News survey had expected Q1 GDP to decline 5.7 percent. The Commerce Department's earlier Q1 GDP estimate was a 6.1 percent decline. The U.S. government revises its GDP estimate as it receives more information on a respective quarter not available earlier. In 2008, the world's largest economy grew a scant 1.1 percent -- or well below capacity.



A large two-quarter decline


What's more, the Q4 2008/Q1 2009 contraction is the worst two-quarter contraction in 60 years -- an economic performance which shows the effects of the financial crisis' acute period following the failure of Lehman Bros. Add the 0.5 percent decline in Q3 2008 and it's the first time the U.S. economy has contracted for three consecutive quarters since 1975. President Gerald Ford, R-Michigan, was the nation's chief executive then.

In addition, during the past four quarters, the U.S. economy has contracted 2.5 percent -- its severest decline since 1982, also a period hurt by a pronounced recession. In current dollars, U.S. GDP fell to $14.1 trillion.

Down slower is 'the new up'


Stuart Hoffman, chief economist for PNC Financial Services Group in Pittsburgh, said investors need to take the stance that expects U.S. economic conditions to improve from here.

"The economy is still in recession but we're slowing down the rate of descent," Hoffman told Bloomberg News Thursday. "This quarter [Q2] will show a much smaller rate of decline, about half that of the first quarter. Down slower is the new up."

Further, the bulk of the 5.5 percent Q4 GDP decline stems from business inventory liquidation, as businesses both cut back production to clear their warehouses of excesses goods amid a large decline in aggregate demand.

In Q1, purchase of goods and services plunged at a 7.4 percent annualized rate, business investment sank 37.3 percent, final sales fell 3.3 percent, exports plummeted 30.6 percent, before-tax profits declined 17.6 percent, and after-tax profits fell 14.7 percent.

One bright spot in the Q1 data: the U.S. savings rate -- which was too low for more than a decade -- increased to 4.3 percent. However, economists cautioned that a too-high savings rate will decrease the strength of anticipated economic recovery.

Economic Analysis:
The positive dimensions to Q1's 5.5 percent GDP decline? 1) The revision shows a less-deep Q1 plunge than the earlier estimate and 2) inventories and production have been brought back in-line with demand -- something that sets the stage for future production increases. Add the impact of fiscal stimulus working its way into the economy, and one can see a bottoming recession in Q3/Q4, and the start of the recovery.

However, investors should remain cautious: the U.S. job market must turn around to give the U.S. economy that major source of demand needed to increase both real incomes and corporate earnings -- the foundation for economic health and stock market gains.
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