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GDP Down 6.1%, Reflecting Continuing Economic Woes

The U.S. economy contracted at a surprisingly sharp 6.1 percent rate in the first quarter as exports and business inventories plummeted.

The drop in gross domestic product, reported by the Commerce Department on Wednesday, was much steeper than the 4.9 percent annual rate expected by economists and followed a 6.3 percent decline in the fourth quarter.

GDP, which measures total goods and services output within U.S. borders, has now dropped for three straight quarters for the first time since 1974-1975.

The data came as the Federal Reserve resumed a regular two-day meeting. The Fed, which has cut interest rates to almost zero and pumped about a trillion dollars into the economy to try and break its downward spiral, is expected to leave policy unchanged at the meeting.

"There won't be positive growth until the second half of the year probably, but the fall in the second quarter, if it's negative at all, will be far smaller," said Michael Darda, chief economist at MKM Partners in Greenwich, Conn.

The advance report from the Commerce Department showed business inventories plunged by a record $103.7 billion in the first quarter, as firms worked to reduce stocks of unsold goods in their warehouses.

That sliced 2.79 percentage points from the overall GDP figure. Excluding inventories, GDP contracted 3.4 percent.

Inventory Drop is Good News

But the sharp drawdown in inventories is good news as it suggests that manufacturers and retailers have reduced the stock of unsold merchandise to manageable levels and could be instrumental in pulling the economy out of recession.

Recent manufacturing surveys by the regional Federal Reserve Banks have shown an improvement in new orders.

"We should see a diminishing effect from inventory on GDP going forward," said Keith Hembre, chief economist at FAF Advisors in Minneapolis.

Exports collapsed 30 percent, the biggest decline since 1969, after dropping 23.6 percent in the fourth quarter. The decline in exports knocked off a record 4.06 percentage points from GDP.

Investment by businesses tumbled a record 37.9 percent in the first quarter, while residential investment dived 38 percent, the biggest decline since the second quarter of 1980.

However, there were some bright spots in the report.

Consumer spending, which accounts for over two-thirds of economic activity, rose 2.2 percent, after collapsing in the second half of last year.

Consumer spending was boosted by a 9.4 percent jump in purchases of durable goods, the first advance after four quarters of decline.

The Commerce Department said the government's $787 billion rescue package of spending and tax cuts, approved in February, had little impact on first-quarter GDP.

Part of the stimulus package is designed to bolster state and local and government spending, which fell at a 3.9 percent rate in the first quarter, the largest decline since the second quarter of 1981.

A separate report showed U.S. home loan applications fell last week to the lowest level since mid-March, even as mortgage rates clung to record lows.

The Mortgage Bankers Association said its mortgage applications index, which reflects demand for both purchase loans and refinancings, fell 18.1 percent.

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