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US economy sinks at a 5.7% pace in Q1

(Agencies)
Updated: 2009-05-29 22:44

President Barack Obama's stimulus package of increased government spending and tax cuts, along with aggressive action by the Fed to spur lending, should help revive the economy.

Still, both the Fed and private economists caution 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.

Many economists say the jobless rate will hit 10 percent by the end of this year. Some say it could rise as high as 10.7 percent in the second quarter of next year before making a slow descent.

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 One of the forces that plunged the country into a recession was the financial crisis that struck with force last fall and was the worst since the 1930s. Economists say recoveries after financial crises tend to be slower.

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 US 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.

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