US economy contracts at rate of 5.7%

The US economy continued to contract in the first quarter of this year, but at a slower pace than previously thought, as the pain of the recession spread from consumers to businesses in the face of eroding global demand.

Revised commerce department figures showed on Friday that US gross domestic product declined by an annualised rate of 5.7 per cent in the first three months of the year, compared with last month’s estimate of 6.1 per cent. The decline was less severe than original projections due to slower liquidation of inventories and the narrowing trade gap.

The latest estimate fell short of economists’ expectations of a 5.5 per cent decline, but still marks an improvement from the fourth quarter contraction of 6.3 per cent, which was the sharpest since 1982.

A bright note in Friday’s report was a dramatic improvement in corporate profits, which surged by 3.4 per cent to $1,307bn in the first quarter after plummeting by 16.5 per cent in the fourth quarter. The rise was fuelled by a spike in financial sector income, which soared by 94.9 per cent, as companies slashed costs and cut jobs. Compared with the same quarter last year corporate profits were off by 18 per cent.

“Banks are clearly benefiting from being able to borrow at exceptionally low rates thanks to government intervention, which is showing up in their bottom lines,” said Richard Moody, chief economist at Forward Capital.

In spite of the improvement, Friday’s results show how far the US economy has fallen since the recession began in December 2007. The last six months have been the weakest such period in 51 years and the US economy has not contracted for three consecutive quarters since the first quarter of 1975.

During the first quarter plunging exports, business investment and the collapse of spending on non-residential construction continued to be a drag on the economy. Improved consumer spending has provided a lift to overall economic output, although consumption of non-durable goods was weaker than originally estimated and continues to be a point of concern as job losses keep climbing.

“Massive government stimulus and support efforts deserve credit for enabling the economy to avoid sinking into a deflationary abyss, but there is a considerable difference between avoiding calamity and enjoying recovery,” said Joshua Shapiro, chief US economist at MFR.

A recent stock market rally and improved consumer confidence, however, have raised hopes that Americans could begin to boost their spending. The Reuters/University of Michigan survey of consumer sentiment, also released on Friday, showed a rise from 65.1 in April to 68.7 in May, the highest level since last September. It hit a 30-year low of 55.3 in November.

Economists have also taken some hope from signs of stability indicating that the pace of the downturn may be slowing and that an aggressive array of stimulus measures will lift the economy out of the worst slump since the Great Depression sometime next year. Earlier this week a survey by the National Association of Business Economics said that the economy would emerge from the recession by the end of this year and predicted growth of 2 per cent next year.