Real GDP Declines Far More Than Predicted
Falls for three consecutive quarters for the first time in 34 years.
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The Commerce Department's Bureau of Economic Analysis advance estimate of first quarter 2009 real GDP confirmed my weaker than consensus expectation. Real GDP dropped at an annual rate of 6.1% in the January through March quarter.
This follows the 6.3% annualized rate of decline in the final quarter of 2008. Real GDP contracted at an annual rate of 0.5% in the third quarter of 2008. This gives us the first decline in real GDP in 3 consecutive quarters in 34 years.
Contributing to the decline in first quarter real GDP was the decline in US exports, reflecting economic weakness outside the US. Imports are a subtraction from GDP, and imports fell, due to weakness in the US.
Very significant in the GDP decline was an accelerating pace of inventory liquidation by business, amounting to $103.7 billion. This was a $77.9 billion drag on the first quarter, as fourth quarter liquidation was only $25.8 billion: $103.7 - $25.8 = 77.9 (I expect inventory drawdown to be even more pronounced in the second quarter, which will contribute to the fourth successive quarterly decline in real GDP).
Also hurting first quarter real GDP were declines in business equipment and software investment that were worse than the declines in the fourth quarter, a much larger drop in non-residential investment in structures than occurred in 2008's fourth quarter, and a faster decline in real residential investment than in the fourth quarter.
The consumer became a positive in the first quarter. Imports fell faster than exports, contributing positively to real GDP.
On inflation in 1Q:'09, the real personal consumption expenditures (PCE) deflator declined at a 1% annualized rate, following a 4.9% annualized decline in 2008's fourth quarter. The core (excluding food and energy) PCE deflator rose a subdued 1.5% in the first quarter, following a 0.9% rise in the fourth quarter, the lowest increase in 47 years. These moves are reflective of heavy discounting in a weak demand climate
Deflation remains the threat. As an example, current dollar or nominal GDP receded 3.5% annualized in the first quarter, following a 5.8% annualized decline in the final quarter of 2008.
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