- The Washington Times - Wednesday, April 29, 2009

The U.S. economy continued its free fall in the first three months of the year, shrinking at a 6.1 percent rate after falling 6.3 percent in the final three months of 2008, the Commerce Department reported Wednesday morning.

It was the economy’s worst performance in a generation, propelled by a collapse in lending markets last fall that largely continues to this day. Nearly every sector of the economy plummeted during the winter quarter, contributing to the first such huge half-year drop in economic activity since the severe recession of 1981.

The closure of auto production plants as General Motors Corp. and Chrysler LLC combat insolvency posed a substantial drag to the economy, accounting for 1.36 percentage points of the drop in economic output after subtracting nearly twice that amount in the fourth quarter.

And the global reach of the recession, which started in the United States, came back to haunt the U.S. economy with a gigantic drop of 30 percent in exports. Exports had been a source of strength for the U.S. economy until the credit crisis struck in October.

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But a ray of hope came through the bleak report — a revival of consumer spending after months of decline. The 2.2 percent uptick in consumer spending, after adjusting for inflation, gave some relief to businesses such as the automakers that have been forced to stop producing goods until they can get rid of the excess inventories on their shelves and dealer lots.

As businesses ran off their surplus goods, the drop in bulging inventories accounted for nearly half the quarter’s drop in economic output, the department said. But economists said that was a good sign for the economy in the future, since the depletion of stored goods means that businesses will have to start producing more to sell in the months ahead.

Harm Bandholz, economist at Unicredit Markets, said a huge drop in inventories can be a harbinger for an improving economy because it often marks the low point of the recession.

“The end of the inventory rundown and the improvement in the order situation at least indicates that the U.S. economy is finally on the mend and that the nasty recession should end in the second half of the year,” he said.

Still, the economic contraction was worse than most economists expected in the first three months, posing an unpleasant surprise for financial markets. Indications are that the U.S. stock market will head lower at the open of trading in New York.

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