Friday, May 1, 2009

U.S. Economy Shrank at 6.1% Rate in First Quarter:

Hopeful Signs Seen in GDP's Fall

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The U.S. economy shrank sharply in the first quarter, capping its worst six-month performance in 51 years, the government said Wednesday. But a large decline in inventories and an uptick in consumer spending suggest the economy is closer to the day when it resumes growing.

The Federal Reserve, meanwhile, signaled it will hold official interest rates low and continue to buy up government bonds and other debt, in an effort to pump credit into banks and companies. The Fed statement triggered a fall in bond prices, pushing the yield on a 10-year note up almost a tenth of a percentage point to 3.1%, a five-month high, a sign that some investors were disappointed the Fed didn't unveil more aggressive plans to buy Treasurys.

The U.S. economy contracts 6.1% in the first quarter, a greater drop than expected. But as WSJ's Kelly Evans tells colleague Phil Izzo, although the numbers look bad, there are some positives.

The data cheered stock investors. The Dow Jones Industrial Average closed up 168.78 points, or 2.1%, to 8185.73, its highest finish since Feb. 9. In Tokyo early Thursday, stocks were up 4%.

The gross domestic product shrank at an inflation-adjusted 6.1% annual rate in the first quarter, nearly matching the 6.3% decline in the fourth quarter. Business investment plunged, as did exports. This recession marks the first time since 1975 that the U.S. economy has contracted for three quarters in a row.

But in more favorable signs, firms drew down inventories at the fastest pace since the start of the decade. That could lead manufacturers to ramp up production. And consumer spending rose.

"We think we're moving toward stabilization in the economy," said Joseph Brusuelas of Moody's Economy.com.

Excluding the drop in inventories, ultimate demand in the economy fell at a 3.4% annual rate, compared with 6.2% in the fourth quarter. The latest forecasts see the economy slipping this quarter at a 2% to 3.5% rate.

The Fed kept interest rates effectively at zero and didn't alter previously announced plans to buy Treasury and mortgage-backed securities. It noted that "the economic outlook has improved modestly" since March, but added "economic activity is likely to remain weak for a time."

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