U.S. GDP Declines 6.1% In 1Q As Inventory Cutbacks Weigh Heavily

Businesses worked with a vengeance last quarter to reduce levels of unwanted inventory. The 6.1% (AR) drop in real GDP was about the same as during 4Q '08, but together the back-to-back declines were the worst since early-1958. Consensus expectations had been for a 1Q decline of roughly 5.0%.

Cutbacks of unwanted levels of inventory, which built up as demand cratered during last year's second half, subtracted 2.8 percentage points from GDP growth. That was the most since the first quarter of 2000 and it rivals the biggest negative contribution from inventories since the early-1980s.

The correction followed an unwanted inventory buildup late during 2008 as demand fell sharply. Real U.S. final sales to domestic purchasers contracted at a 5.1% annual rate that was little different from the 4Q decline. Together, these declines also were the sharpest since 1958. However, the latest decline in overall demand took on somewhat of a different composition.

Personal consumption expenditures actually rose at a 2.2% annual rate (-1.2% y/y) last quarter and that reversed a bit of the decline during the prior two periods. Spending on motor vehicles rose moderately during the quarter (-18.5% y/y) after five consecutive down periods. Business fixed investment fell at a 21.7% rate (-5.2% y/y) and residential investment dropped at a 22.8% rate (-19.4% y/y) from Q4.Spending on furniture also rose (-0.1% y/y) and reversed a piece of the declines during the prior two quarters.

Elsewhere the pattern of severe weakness in activity continued or intensified. Residential investment fell at a 38.0% annual rate (-23.2% y/y) last quarter. Housing investment has fallen steadily since its peak in late 2005 but the 1Q drop was the sharpest during the period. Business investment also has fallen sharply but here again the rate of decline intensified. The 37.9% (AR) drop last quarter (-16.3% y/y) set a new record for the postwar period.

The shortfall in overall GDP growth last quarter owed much to a 3.9% drop (+1.7% y/y) in expenditures by the government sector. It was the first decline since late 2005 and it was led by a surprising 4.0% drop (+5.6% y/y) drop in Federal spending. That was paced by a 6.4% decline (+5.2% y/y) in defense expenditures. State and local spending also fell at a 3.9% annual rate -0.6% y/y).

If there was any solace in the GDP report it was in the foreign trade sector where net exports contributed 2.0 percentage points to 1Q GDP growth. But there was no real positive news here either, just that imports fell somewhat more than exports. Imports fell at a 34.% annual rate (-16.5% y/y) while U.S. exports fell at a 3.0% rate (-11.3% y/y).

Even the inflation news was not great. The 2.9% increase in the GDP chain price index was up from the 0.5% annual rate of increase during 4Q. The reason for the rise was 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 while the residential investment chain price index fell at a 4.8% rate (-5.3% y/y). The weakness in business caused the nonresidential investment price index also to slip at a 0.9% rate (+2.5% y/y), the first decline since 2007.

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