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Economy in Brief

Decline in U.S. 1Q GDP Is Trimmed 
by Tom Moeller June 25, 2009

The Commerce Department indicated that the second and "final" estimate of 1Q '09 real GDP was -5.5% (AR), little different from the "preliminary" estimate released last month. The large drop, however, came on the heels of the 6.3% decline during 4Q '08 and together they were the worst since early-1958. The latest revision compares to Consensus expectations for a 5.7% decline.

Total corporate profits also were revised little and posted a 3.8% (-17.6% y/y) increase due to the near-doubling of financial sector earnings versus 4Q. Nevertheless, these earnings were still off by 42.1% from 1Q '08. The decline in nonfinancial sector earnings was lessened slightly to 6.6% (-11.5% y/y) following a 10.7% 4Q decline, but as recessions abroad progressed, the decline in earnings in the foreign sector was deepened to 4.2% (-4.8% y/y).

The GDP effect of the reduction of unwanted inventories, in the face of declining demand, was revised little at -2.2 percentage points. Regardless, the subtraction was the most since the first quarter of 2000 and it rivals the largest negative contribution from inventories since the early-1980s. Real U.S. final sales to domestic purchasers fell at a little-revised 5.4% rate. Combined with the 4Q '08 decline of 5.8%, final sales to domestic purchasers fell the most since 1958.

The rise in personal consumption expenditures last quarter again was lessened slightly to 1.4% (-1.4% y/y). This modest increase followed sharp declines during the prior two quarters. Spending on motor vehicles rose moderately during the quarter (-18.7% y/y) after five consecutive down periods. As corporate profits fell along with the prospects for overall economic growth, business fixed investment fell at a 37.3% rate (-16.1% y/y) and residential investment dropped at an unrevised 38.8% rate (-23.4% y/y) from 4Q.

The significant shortfall in expenditures by the government sector still accounts for a significant portion of last quarter's weakness in GDP. The little revised 3.1% decline was the first since late-2005. The drop was led by a 4.4% decline (+5.5% y/y) in Federal spending that was paced by a 6.7% decline (+5.1% y/y) in defense expenditures. Budget cutbacks due to the decline in tax revenues with the recession caused state & local spending to fall at a 2.2% annual rate (-0.1% y/y).

The foreign trade sector made up for some of the domestic economy's weakness as net exports contributed a little-revised 2.4 percentage points to 1Q GDP growth. Imports fell at a 36.4% annual rate (-17.2% y/y) while recessions abroad pulled U.S. exports down at a lesser 30.6% rate (-11.5% y/y).

Inflation continued to show signs of firming. The unrevised 2.8% increase in the GDP chain price index was up from the 0.5% annual rate of increase during 4Q. The reason for the acceleration is that import prices fell at a faster rate than export prices. Domestic prices, however, reflected the weak economy and fell at a 1.0% annual rate (+0.8% y/y) after a 4.3% 4Q decline.The PCE price index fell at a 0.9% annual rate (+0.8% y/y) while the residential investment chain price index fell at a 4.9% rate (-5.3% y/y). The weakness in business spending caused the nonresidential investment price index also to slip at a 1.5% rate (+2.4% y/y), the first quarterly decline since 2007.

The U.S. National Income & Product Account data is available in Haver's USECON and the USNA databases.

Acquisition of Merrill Lynch by Bank of America is this morning's testimony by Fed Chairman Ben S. Bernanke and it is available here.

Chained 2000$, % AR 1Q '09 (Final) 1Q '09  (Preliminary) 1Q '09 (Advance) 4Q '08 1Q Y/Y 2008 2007 2006
GDP -5.5 -5.7 -6.1 -6.3 -2.5 1.1 2.0 2.8
  Inventory Effect -2.2 -2.3 -2.8 -0.1 -0.8 0.1 -0.4 0.0
Final Sales -3.3 -3.4 -3.4 -6.2 -1.7 1.4 2.4 2.8
Foreign Trade Effect 2.4 2.2 2.0 -0.2 -1.4 1.4 0.6 0.2
Domestic Final Demand -5.4 -5.3 -5.1 -5.8 -3.1 -0.0 1.8 2.6
Chained GDP Price Index 2.8 2.8 2.9 0.5 2.1 2.2 2.7 3.2
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