Signs point to bottoming of recession

Signs are growing that the nation’s deep economic recession may have struck bottom.

Consumers are back in business, increasing spending at a 2.2 percent rate in the January-to-March quarter after six months of retrenchment, and businesses seem to have gotten rid of most of their unwanted inventories with a massive $104 billion liquidation, according to a report Wednesday from the Commerce Department. That means production of new goods can resume and growth can return by the second half of the year - a view shared by many stock investors.

Hopes that the economy is at a turning point helped spur a 168-point jump in the Dow Jones Industrial Average.

The burst of optimism was remarkable - and perhaps telling - given an otherwise gloomy report showing the economy plummeted for a third straight quarter in its worst performance since 1958. On the surface, there was only a negligible difference between the 6.1 percent rate of plunge in economic output during the first quarter and a 6.3 percent drop in the final quarter of 2008.

“It might sound absurd, but the larger-than-expected decline is good news for the upcoming quarters,” said Harm Bandholz, economist at Unicredit Markets. Almost half the drop in economic output was the result of the massive fall in inventories, which when combined with the biggest decline in business investment since World War II during the quarter puts businesses in the position of being able to restart activities in future quarters, he said.

“Consumer spending, the largest piston in the economic engine, has stopped being a drag on the economy,” said Sung Won Sohn, professor at California State University, highlighting the best news from the report. “Despite accelerating layoffs and a continuing credit crunch, consumers have been out shopping [and] their outlook has improved.”

Mr. Sohn noted that the big drop in gasoline and other energy prices since the summer has helped consumers and is equivalent to a $250 billion tax cut. Also bolstering consumers, he said, is “the better tone in the stock market, the bottoming of home sales and the massive economic stimulus from Washington.”

Martin Hutchinson, analyst at Breakingviews.com, noted that one source of weakness in the first quarter - an unexpected 4 percent drop in federal spending reflecting a defense drawdown - was an aberration that won’t be repeated in future quarters as the huge $787 billion stimulus measure passed by Congress filters through the economy.

“The slowing decline suggests the economy is nearing a bottom,” he said.

Federal Reserve and administration officials also have been inclined to see “shoots of green” emerging from the bleak winter landscape, with the Fed on Wednesday noting that the pace of economic decline has slowed some recently.

But other economists say deep, lingering problems from the collapse of trillion-dollar credit markets, the housing market and the banking system will hold the economy back for years, while a possible global swine flu pandemic also could crush the budding recovery.

“The good news … is that the most severe phase of the recession is behind us,” said Brian Bethune, economist at IHS Global Insight. He said the economy’s retreat will be slower-paced in future quarters, but consumer spending will remain a “wild card” because of the many pressures on consumers - including the swine flu scare and the disappearance of nearly 600,000 jobs a month since late last year.

Reversing a breathtaking drop of more than 50 percent in investment by consumers and businesses in everything from housing to computer software in the last quarter will not come easily either, he said.

And the deep slump that has spread to nearly every other economy around the world threatens to feed back into further declines in the United States, as it did last quarter with a stunning 30 percent decline in exports. Growth throughout the rest of the world last year had helped to buoy the U.S. economy until the global credit crisis struck in September.

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