U.S. Economy Shrinks At A 5.7% Rate; Better Than Expected

The U.S. government said the economy shrank at an annual pace of 5.7% in the first quarter, a less severe drop than initially reported, but still the second-biggest quarterly decline in 27 years, CNN Money reports.

Economists expect a drop in gross domestic product (GDP) this quarter as well, although not as sharp as in the first three months of the year. Last month, the government initially reported that GDP fell at an annual rate of 6.1%. The revision fell short of economists’ expectations of a 5.5% drop, according to a consensus estimate from Briefing.com.

The first quarter of 2009 marked the third quarter in a row that the economy has contracted. It was the second worst drop in the measure since the early 1980s, behind only the fourth quarter of 2008, when GDP plunged at an annual pace of 6.3%.

Much of the revision in first-quarter GDP was attributed to a lower reading in business inventories, as sales of domestic products were unchanged at a 3.4% annual rate of decline. Inventories fell by $91.4 billion, compared to an initial reading of $103.7 billion. As a result, the subtraction to the annual rate of GDP growth was 2.3%, rather than 2.8%.

Businesses cut their inventory levels in the face of falling demand. A cutback in inventory levels means that when the economy does start to recover, businesses will have to start producing goods again to meet demand.

In the first quarter, spending by individuals was revised lower to a rate of 1.5% growth, down from the initially reported 2.2% rate.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said in a research letter he does not think that the cut back in inventories is enough to support a rebound in the second half of this year. But, he wrote, “the speed of the drop will slow. We expect Q2 GDP of about minus 2%.”

The government’s final revision of first-quarter GDP is due June 25.