Decline in U.S. 1Q GDP IsTrimmed

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.

Orders in the Area fell by 32.1% a new Yr/Yr record leading to headlines about how slow the European recovery is going to be. But the pace of decline in orders over three months has been sharply reduced to an annual rate of decline of 8.2% compared to 30-plus percent drop over six months and 12-months. Both foreign-sourced and domestic–sourced orders have trimmed their respective rates of decline sharply over three months. The strongly negative Yr/Yr growth rate is mostly due to legacy weakness over the earlier period.

Country level statistics are encouraging. Germany and France have cut their respective three month growth rate declines to a pace that is single digits; the annualized rate of decline is less than a 5% pace. Italy is still shedding orders at nearly a 30% pace. In the UK a spike in orders has boosted the three month growth rate to a +53% annual rate.

Other signs in the Area show improvement as well. Italy, despite pronounced order weakness, has been showing improved confidence for both businesses and households. It posted a surprise rise in IP as well. The EMU-wide PMI indices for MFG and for Services are showing improvement on the month. On balance their trends are nothing to be disappointed about, taking into account the extent of the weakness in the Area which has hit countries somewhat unevenly and where fiscal responses have been far from uniform as well. For example The Netherlands today confirmed that its GDP drop in Q1 was the worst in sixty years. It takes time to come back from that kind of weakness

Earlier improvement in the labor market improvement stalled in June. Initial claims for unemployment insurance edged up last week by 15,000 to 627,000, their highest level since May. The latest increase followed a modest 7,000 rise during the prior week. Despite these gains, however, initial claims were down from their March peak of 674,000. In addition, the four-week average of claims, which smoothes out some of the volatility in the weekly numbers, fell slightly to 617,250 which was its lowest level since since mid-February. The latest weekly level by far exceeded the Consensus expectation for 601,000 claims.

The Labor Department indicated that the largest increases in initial claims for the week ending June 13 were in Florida (+8,383), Pennsylvania (+3,191), Missouri (+2,874), Puerto Rico (+2,561), and California (+2,540), while the largest decreases were in Michigan (-5,414), New York (-5,299), North Carolina (-4,714), Tennessee (-4,414), and Ohio (-3,802).

Though continuing claims for unemployment inched up in the latest week, modest improvement in the job market still is evident in the figures. Claims rose a slight 29,000 following a sharp 126,000 decline from their high during the prior week. Continuing claims provide an indication of workers' ability to find employment. At 6,738,000, however, claims remained more than twice the year ago level. Further suggesting that the job market's improvement is just modest was that the four-week average of continuing claims fell just slightly from their record high. The series dates back to 1966.

Also indicating marginal labor market improvement was the insured unemployment rate, which held at 5.0% versus the cycle high of 5.1%. The level remained more than double that of June 2008 and the highest since 1983. During the last ten years there has been a 93% correlation between the level of the insured unemployment rate and the overall rate of unemployment published by the Bureau of Labor Statistics.

Clearly, the latest weekly figure understates labor market distress in some states.The highest insured unemployment rates in the week ending June 6 were in Michigan (7.0 percent), Oregon (6.8), Puerto Rico (6.7), Nevada (6.3), Pennsylvania (6.2), Wisconsin (5.7), California (5.4), Arkansas (5.3), Illinois (5.3), and North Carolina (5.3).

The unemployment insurance claims data is available in Haver's WEEKLY database and the state data is in the REGIONW database.