Capital spending, inventories crater as consumer spending rebounds The U.S. economy contracted violently again in the first quarter of the year as business investment declined at a record rate, the Commerce Department reported Wednesday. Real gross domestic product -- the inflation-adjusted, seasonally adjusted value of all goods and services produced in the United States -- fell at a 6.1% annualized rate in the first quarter, nearly matching the 6.3% decline in the fourth quarter of 2008. Read the full report. The two-quarter contraction is the worst in more than 60 years. Since the 1947, the economy had never contracted by more than 4% for two consecutive quarters. With a 0.5% drop in the third quarter of 2008, it's the first time the economy has contracted for three consecutive quarters since 1975. In the past four quarters, the economy has fallen 2.6%, the biggest year-over-year decline since 1982. The big story for the first quarter was in the business sector, where firms halted new investments, and shed workers and inventories at a dizzying pace to bring down production and stockpiles to match the lower demand from U.S. and foreign markets. The 6.1% decline in GDP was larger than the 5.1% contraction expected by economists surveyed by MarketWatch. Economists expect a 2% decline in the current quarter, followed by a tepid 1% gain in the third quarter, as the massive stimulus from Congress and the Federal Reserve kicks in. See Economic Preview. Although the decline in GDP in the first quarter was nearly as deep as in the fourth quarter, the report was more varied in tone, with some positives mixed with some record-setting declines. Much of the drop was due to a large inventory correction, which is helping to rebalance supply and demand and is setting the stage for at least a modest recovery. Details Final sales, which exclude inventories, fell at a 3.4% rate in the first quarter after plunging 6.2% in the fourth quarter. Consumer spending rebounded to rise 2.2% after dropping at a 4% annual pace in the previous two quarters. Consumer spending added 1.5 percentage points to GDP. Spending on durable goods rose 9.4%, spending on nondurable goods rose 1.3%, and spending on services increased 1.5%. Despite the bump in spending, the savings rate rose to 4.2%, the most since 1998. Real disposable income rose 6.2%. Business investments fell at a record 37.9% annual rate in the first quarter. Investments in structures dropped a record 44.2%, and investments in equipment and software fell at a 33.8% pace, the biggest drop since 1958. Business fixed investment subtracted 4.7 percentage points from growth. Inventories declined by $103.7 billion. The change in inventories subtracted 2.8 percentage points from growth. Investments in housing fell for the 13th consecutive quarter, dropping at a 38% annual rate, the largest decline since 1980. Residential investments subtracted 1.4 percentage points from growth. Trade collapsed during the quarter. Exports fell 30%, the most in 40 years, reflecting the global recession that is hitting Europe, Japan and other trading partners even harder than the United States. Imports dropped 34.1%, the most in 34 years, as U.S. consumers and businesses stopped buying. Net exports added 2 percentage points to growth, however, as the trade gap narrowed. Final sales to domestic purchasers - a measure of domestic demand - fell 5.1% after dropping 5.8% in the fourth quarter. Government spending fell at a 3.9% annual pace, the largest drop in 13 years. Spending by state and local governments fell 3.9%, the most since 1981. Federal spending fell 4%, including a 6.2% drop in the volatile defense spending category. Government spending subtracted 0.8 percentage points from growth. The price index for domestic purchases (prices paid by U.S. residents) fell 1% in the quarter. Consumer prices fell 1%, while core consumer prices (which exclude food and energy) rose 1.5%. In current dollar terms, GDP fell 3.5% to at annual rate of $14.01 trillion.

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