Businesses cut jobs, investments and inventories, but increased profits
The U.S. economy contracted violently again in the first quarter, falling at a revised 5.7% annual rate after sinking 6.3% in the fourth quarter, the Commerce Department reported Friday in its second estimate of quarterly gross domestic product.
Business investment declined at a record rate during the quarter. Investments in housing fell at the fastest pace in 29 years. Domestic demand fell at the fastest rate in 29 years. Exports fell at the fastest pace in 38 years.
The negative 5.7% estimate for real seasonally adjusted gross domestic product was slightly stronger than the first estimate of a 6.1% decline released a month ago. The revisions, which came from more complete information not available then, saw higher inventory building and greater exports, offset by weaker consumer spending, compared with the first estimate.
Economists surveyed by MarketWatch were forecasting that the revision would be to a negative 5.5%. They expect the economy to contract 2% this quarter and grow 1.5% next.
Business sector
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 massive pullback reaped benefits for the owners. Corporate profits from current production rose 3.4%, or $42.6 billion, compared with the fourth quarter when they fell by $250 billion, or 16.5%.
Over the past year, before-tax profits are down 18%. After-tax profits are down 15%, the largest decline in 28 years.
Much of the contraction in the economy was due to unprecedented inventory liquidation by businesses. Falling inventories subtracted from GDP in the first quarter, but that liquidation will set the stage for stronger growth later after companies have brought supply back in line with demand.
The swing in the inventory cycle from being a massive drag to being a small help is the main reason economists expect the economy to begin to grow again in the third or fourth quarters. That growth won't be sustainable, however, unless consumer and business demand picks up, both here and abroad.
Final demand was extremely weak in the first quarter. U.S. residents' purchases of goods and services (regardless of country of origin) dropped 7.5% annualized, the largest decline since 1980.
Final sales of U.S. goods and services fell at a 3.4% annual rate. Final domestic sales of U.S. goods and services fell 5.3%. Exports fell at 28.7% annual rate, the most in 28 years, as foreign markets fell into a deep recession.
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 2.5%, the biggest year-over-year decline since 1982.
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.
