The U.S. economy turning the corner?

The U.S. economy has contracted for the second quarter in a row, again more than an annualised 6% in the first quarter of 2009. But, will the economy start to recover?

Alan Rappeport of the Financial Times reported as follows:

The US economy continued to contract in the first quarter of this year as business investment collapsed in the face of eroding global demand.

Preliminary commerce department figures showed on Wednesday that US gross domestic product declined by an annualised rate of 6.1 per cent in the first quarter, after declining by 6.3 per cent during the fourth quarter of last year. The decline was worse than the 4.7 per cent that economists expected and marks a slight improvement from the fourth-quarter contraction, which was the sharpest since 1982.

The US economy has not contracted for three consecutive quarters since the first quarter of 1975 and the last six months have been the weakest such period in 51 years.

The economic slowdown was blunted by an uptick in consumer spending and a rebalancing of the trade gap due to a steep decline in imports. In the first quarter imports plunged by 34.1 per cent while exports fell by 30 per cent, as trade dried up. It was the biggest quarterly decline in exports since 1969.

Business investment was the biggest drag on economic growth. The 51.8 per cent decline drained 8.83 percentage points from GDP, as the recession spread from consumers to companies. Private businesses decreased inventories by $103.7bn in the first quarter compared with a decline of $25.8bn in the fourth quarter. That sapped 2.79 per cent from overall GDP, as companies worked to clear stocks.

“What started out as a housing-led downturn that would hit consumption hardest is now clearly having a much bigger impact on businesses,” said Paul Ashworth, US economist at Capital Economics.

Economists took hope that the US consumer proved resilient, with spending rising by 2.2 per cent compared with a decline of 4.3 per cent during the last quarter. Spending was focused on durable goods and lifted overall output by 1.5 percentage points.

Government spending, which helped to buoy GDP in the last quarter, eased so far this year. Federal consumption was off by 4 per cent in the first quarter compared with a 7 per cent increase the quarter before, as defence spending dipped.

Although the US economy has been mired in the worst recession since the Great Depression and unemployment, at 8.5 per cent, sits at a 25-year high, better-than-expected data and a stock market rally had recently offered some glimmers of hope. And though most figures continue to show declines, there had been signs of stabilisation in consumer confidence, home sales and construction.

Economists predict that the impact of the $787bn government stimulus package will not be felt until the second half of this year and that the economy could contract further in the second quarter before flattening.

The US government’s latest 10-year budget outline projected that the economy would contract by 1.2 per cent in 2009 before rebounding to 3.2 per cent growth in 2010. However, many economists suggest those forecasts are overly optimistic.