29 May 2009

U.S. economic slump eases

The following is excerpted from today's edition of "globeandmail.com".

The U.S. economy sank at a 5.7 per cent pace as the brute force of the recession carried over into the start of the year. However, many analysts believe activity isn't shrinking nearly as much now as the downturn flashes signs of letting up.

The Commerce Department's updated reading on gross domestic product, released Friday, showed the economy's contraction from January to March was slightly less deep than the 6.1 per cent annualized decline first estimated last month. But the new reading was a tad worse than the 5.5 per cent annualized drop economists were forecasting.

It was a grim first-quarter performance despite the small upgrade. It marked the second straight quarter where the economy took a huge tumble. At the end of last year, the economy shrank at a staggering 6.3 per cent pace, the most in a quarter-century.

The economy's performance over the last two quarters underscored the grim toll the recession, which started in December, 2007, and is now the longest since World War II, has had on the country. Businesses have ratcheted back spending and slashed 5.7 million jobs to survive the fallout. Financial firms have taken huge losses on soured mortgage investments. Banks and other companies have been forced out of business. Home foreclosures have soared.

Weakness in the first quarter mostly reflected massive cuts in spending by businesses on home building, equipment and many other things. U.S. exports plunged, so did spending on commercial construction and inventories. But those cuts – while huge – were a bit less than first estimated, contributing to the tiny upgrade in overall first quarter GDP.

All of those reductions – as well cutbacks in government spending – more than swamped a rebound in consumer spending. However, consumers weren't nearly as energetic as the government first estimated. They boosted spending at a 1.5 per cent pace, according to the revised figures. That was less than the 2.2 per cent growth rate estimated a month ago.

The government makes three estimates of the economy's performance for any given quarter. Each estimate of gross domestic product is based on more complete information. The third one will be released in late June. GDP, which measures the value of all goods and services produced in the United States, is the best gauge of the nation's economic health.

Economists are hopeful that the economy isn't shrinking nearly as much in the April-to-June quarter as the recession eases its grip. Forecasters at the National Association for Business Economics, or NABE, predict the economy will contract at a 1.8 per cent pace.

Other analysts think the economic decline could be steeper – around a 3 per cent pace. Some think it could be less – about a 1 per cent pace.

Less dramatic cuts by businesses factor into the expected improvement. Consumers, however, are likely to be cautious. There's been encouraging signs recently with gains in orders for big-ticket manufactured goods, some firming in home sales and a slowing in the pace of layoffs.

Federal Reserve Chairman Ben Bernanke and NABE forecasters say the recession will end later this year, barring any fresh shocks to the economy. NABE forecasters predict the economy could start growing again in the third or fourth quarter.

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 per cent, the highest in 25 years – will continue to march upward in the months ahead.

Many