Economy shrinks at 6.1 percent pace in 1Q

WASHINGTON – The economy shrank at a worse-than-expected 6.1 percent pace at the start of this year as sharp cutbacks by businesses and the biggest drop in U.S. exports in 40 years overwhelmed a rebound in consumer spending.

The Commerce Department's report, released Wednesday, dashed hopes that the recession's grip on the country loosened in the first quarter. Economists surveyed by Thomson Reuters expected a 5 percent annualized decline.

Instead, the economy ended up performing nearly as bad as it had in the final three months of last year when it logged the worst slide in a quarter-century, contracting at a 6.3 percent pace. Nervous consumers played a prominent role in that dismal showing as they ratcheted back spending in the face of rising unemployment, falling home values and shrinking nest eggs.

In the January-March quarter consumers came back to life, boosting their spending after two straight quarters of reductions. The 2.2 percent growth rate was the strongest in two years.

Still, the consumer rebound was swamped by heavy spending cuts in virtually every other area.

Businesses cut spending on home building, commercial construction, equipment and software, and inventories of goods. Sales of U.S. goods to foreign buyers plunged as they retrenched in the face of economic troubles in their own countries. Even the government trimmed spending. It was the first time that happened since the end of 2005.

The sharp cuts underscore the toll the housing, credit and financial crises — the worst since the 1930s — are having on the country. The recession, which began in December 2007, has taken a big bite out of national economic activity and snatched 5.1 million jobs.

To cushion the impact of the downturn, the Federal Reserve has slashed a key bank lending rate to a record low near zero and rolled out a string of radical programs to spur lending. The Fed at the end of its two-day meeting Wednesday is expected to keep its key rate near zero and probably hold it there well into next year.

President Barack Obama is counting on his $787 billion stimulus of tax cuts and increased government spending on big public works projects to help bolster economic activity later this year. The administration also has put forward programs to rescue banks and curb home foreclosures — big negative forces weighing on the economy.

Before Wednesday's weaker-than-expected report, many analysts were predicting the economy would shrink less in the current April-June period — at a pace of 1 to 2.5 percent — as Obama's stimulus begins to take hold. Analysts also were hoping the economy would start to grow again in the final quarter of this year.

However, the recent outbreak of the swine flu, which started out in Mexico and has spread to the United States and elsewhere, poses a new potential danger. If the flu stifles trade and forces consumers to cut back further, those negative forces would worsen the recession.

Before the flu outbreak, Fed Chairman Ben Bernanke said the recession could end this year if the government succeeds in stabilizing the shaky financial system and getting banks to lend again.

In recent weeks, Bernanke and his colleagues had cited "tentative signs" of the recession easing in some consumer spending, home building and other reports. Finance officials from the U.S. and other top economic powers meeting here last week also saw some hopeful signs for the global economy.

Fresh glimmers of hope emerged in the U.S. Tuesday. The Conference Board's Consumer Confidence Index rose far more than expected in April, jumping more than 12 points to 39.2, the highest level since November. And a housing index showed that home prices dropped sharply in February, but for the first time in 25 months the decline was not a record.

However, in the first quarter there was much weakness in those areas and others.

Spending on home building fell at a 38 percent annualized rate, the most since the second quarter of 1980. Businesses cut spending on equipment and software at a 33.8 percent pace, the most since the first quarter of 1958. Inventory reductions shaved 2.79 percentage points off overall first-quarter economic activity.

U.S. exports plunged at a rate of 30 percent, the biggest drop since the first quarter of 1969, reflecting the crimped appetite of struggling foreign buyers. The government also cut spending 3.9 percent, the most since the end of 1995.

Even if the recession were to end this year, the economy will remain feeble and unemployment will keep climbing, government officials and analysts say.

The jobless rate is now at a quarter-century high of 8.5 percent and is expected to hit 10 percent by the end of this year. It will probably rise a bit higher in early 2010 before starting to slowly drift downward. Still, the Fed predicts unemployment will stay elevated into 2011, and economists don't think it will return to normal — around a 5 percent jobless rate — until 2013.

More layoffs were announced this week. General Motors Corp. laid out a massive restructuring plan that includes cutting 21,000 U.S. factory jobs by next year. Clear Channel Communications Inc., the largest owner of U.S. radio stations, said it's cutting 590 jobs in its second round of mass layoffs this year amid pressure from the recession and evaporating advertising budgets. And bearings and specialty steels maker Timken Co. indicated it will cut about 4,000 more jobs by the end of this year after earlier suggesting about 3,000 jobs already had been targeted.

Elsewhere, construction equipment maker Bobcat Co. told nearly 250 workers at its two North Dakota plants they will be laid off indefinitely, executive search firm Heidrick & Struggles International Inc. announced plans to cut more jobs and reduce bonuses and salaries, and Lockheed Martin Corp. said it's cutting 225 jobs at a plant in upstate New York.