U.S. 1Q GDP Decline Lessened, Yet Two-Quarter Drop Rivals 1958 Stats; Profits Recovered Modestly

Last quarter, economic weakness in the U.S. was not quite as severe as reported initially by the Commerce Department. The latest estimate of a 5.7% (AR) drop in real GDP compares to the advance estimate of a 6.1% decline and the revision about matched Consensus expectations. Nevertheless, combined with the 6.3% drop during 4Q '08 the GDP declines were still the worst since early-1958.

As the financial sector recovered from its fourth quarter swoon, it lifted the overall measure of corporate profitability. Total corporate profits rose 3.4% (-18.0% y/y) last quarter due to a near-doubling (-41.5% y/y) of financial sector earnings. That recovery followed declines in the financial sector during the prior three quarters which had dropped them to nearly one-quarter of the level at the start of 2008. Earnings in the nonfinancial sector countered that 1Q rise with an 8.6% decline (-13.4% y/y) which about matched the 4Q shortfall. Earnings in the foreign sector continued down by 2.3% (-3.0% y/y) as recessions abroad deepened.

The cutback of unwanted levels of inventories still is estimated to have subtracted significantly from GDP growth last quarter, but the estimate was lessened to 2.3 percentage points from 2.8 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.

Unwanted inventory levels were reduced following the drop-off in real U.S. final sales to domestic purchasers. They fell at a 5.3% rate which was revised slightly from the earlier estimate of a 5.1% decline. Combined with the 4Q '08 decline, final sales to domestic purchasers fell the most since 1958.

The rise in personal consumption expenditures last quarter was lessened to 1.6% (-1.4% y/y) from the initial estimate of a 2.2% increase. 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. Business fixed investment fell at a 36.9% rate (-16.0% y/y) and residential investment dropped at a 38.7% rate (-23.4% y/y) from 4Q. Both of these declines were significantly deeper than reported initially.

U.S. Household Deleveraging and Future Consumption Growth from the Federal Reserve Bank of San Francisco is available here.

The significant shortfall in expenditures by the government sector still accounts for much of last quarter's weakness in GDP. It was little revised at -3.5% and was the first decline since late-2005. The drop was led by a surprising 4.3% decline (+5.5% y/y) in Federal spending that was paced by a 6.7% decline (+5.1% y/y) in defense expenditures. State & local spending also fell at a 3.0% annual rate (-0.3% y/y).

The foreign trade sector made up for some of the economy's weakness as net exports contributed a little-revised 2.2 percentage points to 1Q GDP growth. Imports fell at a 34.1% annual rate (-16.5% y/y) while recessions abroad pulled U.S. exports down at a lesser 28.7% rate (-10.9% y/y).

Inflation continued to show signs of firming. The little revised 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. The PCE price index fell at a 1.0% annual rate (+0.8% y/y) while the residential investment chain price index fell at a 4.6% rate (-5.2% y/y). The weakness in business spending caused the nonresidential investment price index also to slip at a 1.2% rate (+2.4% y/y), the first quarterly decline since 2007. Overall, domestic prices fell at a 1.0% annual rate (+0.8% y/y) after a 4.3% 4Q decline.

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

The Fed's Monetary Policy Response to the Current Crisis from the Federal Reserve Bank of San Francisco can be found here.