US GDP shrinks by 6.1 per cent in FQ

Slightly denting the score card of the US President Barack Obama's first 100 days in office, a US Department of Commerce report released yesterday showed that the US gross domestic product shrank by 6.1 per cent in the first quarter, although Wall Street and economists expected the economy to contract by only 4.7 per cent.

With the US facing the worst recession in 50 years, most Americans thought that the US economy had faced the brunt of the recession in the fourth quarter last year, when the GDP shrank by 6.3 per cent, (See: US adding 50,000 jobs as economy shrinks 6.2 per cent in Q4) but yesterday's report although marginally better than the fourth quarter, shows that the US economy continues to contract despite the huge spending undertaken by the government in February. (See: US Congress approves $787 billion stimulus plan)

The scale of contraction for the first quarter this year, although nearly the same as that of the fourth quarter last year, painted a grim data on US businesses as nearly half the contraction came because of businesses cutting production to keep pace with shrunken sales.

To cope with falling sales, businesses reduced their inventories the most since Second World War by $103.7 billion in the first quarter compared with $25.8 billion in the fourth quarter.

Business investment declined by 38 per cent at an annual rate, creating a big dent in the economic growth as it sapped 8.83 percentage points from the GDP.

The only silver lining in the report was consumer spending, which makes up for about 70 per cent of the economy, rising 2.2 per cent in the first quarter, after declining 4.3 per cent at the end of 2008.

Consumer spending on durable goods like televisions and appliances increased 9.4 per cent, in contrast to a decrease of 22.1 per cent last quarter.  Spending on nondurable goods like food or cleaning supplies increased 1.3 per cent, in contrast to a decrease of 9.4 per cent. 

Exports of goods and services decreased 30 per cent in the first quarter, compared with a decrease of 23.6 per cent in the fourth quarter and personal current taxes decreased $193.5 billion in the first quarter, compared to an increase of $19.7 billion in the fourth.

Carolyn Maloney chairman of the Joint Economic Committee, said in a statement, ''The hangover from the Bush administration is even worse than we thought and these numbers reflect a drawdown in business inventories and continued weakness in the housing and commercial real estate markets. Americans are starting to spend more and I'm optimistic that we will begin to see the effects of the stimulus next quarter.''

President Obama reportedly portrayed himself as the unfortunate heir to President Bush's fiscal "irresponsibility", by saying the outgoing President's policies have doubled the national debt over the past eight years and delivered "the worst economic crisis that we've seen since the Great Depression."

In February, Obama had unveiled a $3.55 trillion budget for the fiscal 2010, a spending plan that outlines big investments in energy, education, defense, health care and the ailing financial industry. (See: Obama unveils $1.75-trillion deficit budget) 

The president had said that he is beginning the long-term task of restoring fiscal discipline despite massive deficit spending that he claimed was necessary to kick-start the economy.

With banks being the biggest beneficiaries of bailouts during the recession, the stress tests on the banks undertaken by the US government recently found that at least six of the 19 largest US banks, which included both Citigroup Inc and Bank of America, may need to raise more capital. (See: Citi, Bank of America told to boost capital: report)

The stress results only goes to show that despite pumping billions of dollars into the ailing US banking system, have failed to stop the banks from hemorrhaging, which will further delay the economic recovery, according to analysts.

This year, the US Federal Deposit Insurance Corporation (FDIC) has closed four more banks and one credit union, taking the number of failures this year to 29. That is up from 25 banks in all of 2008 and three in 2007. (See: Recession claims 4 more banks in the US; 2008 tally reaches 29)

Although analysts had hoped that the US economy would begin to crawl by the second half of the current year, unemployment at a 25-year high at 8.5 per cent and the $787 billion economic stimulus plan unveiled in February, (See: US Congress approves $787 billion stimulus plan) will take a long time to show results, they have now revised the US economic recovery to 2010.