Recession still has grip on the economy

updated 3:56 p.m. ET April 29, 2009

WASHINGTON - The economy shrank at a worse-than-expected 6.1 percent pace at the start of this year as sharp cutbacks by businesses and the biggest drop in U.S. exports in 40 years overwhelmed a rebound in consumer spending.

The Commerce Department’s report, released Wednesday, dashed hopes that the recession’s grip on the country loosened in the first quarter. Economists surveyed by Thomson Reuters expected a 5 percent annualized decline.

Instead, the economy ended up performing nearly as bad as it had in the final three months of last year when it logged the worst slide in a quarter-century, contracting at a 6.3 percent pace. Nervous consumers played a prominent role in that dismal showing as they ratcheted back spending in the face of rising unemployment, falling home values and shrinking nest eggs.

In the January-March quarter consumers came back to life, boosting their spending after two straight quarters of reductions. The 2.2 percent growth rate was the strongest in two years.

Much stronger demand for big-ticket “durable” goods, including cars, furniture and household appliances led the increase. That spending rose at a 9.4 pace, the most in a year. Consumers also boosted spending on clothing, shoes, recreation services, medical care, gasoline and other energy products. But not on food, where spending dipped slightly.

Still, the consumer rebound was swamped by heavy spending cuts in virtually every other area.

Businesses cut spending on home building, commercial construction, equipment and software, and inventories of goods. Sales of U.S. goods to foreign buyers plunged as they retrenched in the face of economic troubles in their own countries. Even the government trimmed spending. It was the first time that happened since the end of 2005.

All told, the economy logged its worst six-month performance since the late 1950s.

The sharp cuts underscore the toll the housing, credit and financial crises — the worst since the 1930s — are having on the country. The recession, which began in December 2007, has taken a big bite out of national economic activity and snatched 5.1 million jobs.

To cushion the impact of the downturn, the Federal Reserve has slashed a key bank lending rate to a record low near zero and rolled out a string of radical programs to spur lending. The Fed on Wednesday said it sees signs the recession may be easing but warned that the economy is likely to remain weak.

The central bank held its key lending rate at a record low of between zero and 0.25 percent, and decided against taking any new steps to shore up the economy. Aggressive action already taken should help bolster the economy, although the Fed left the door open to future action if needed.

Wall Street shook off the weak gross domestic product reading and maintained the day’s gains before Fed’s assessment of the economy. The Dow Jones industrial average added about 180 points in afternoon trading and broader indices also rose.

President Barack Obama is counting on his $787 billion stimulus of tax cuts and increased government spending on big public works projects to help bolster economic activity later this year. The administration also has put forward programs to rescue banks and curb home foreclosures — big negative forces weighing on the economy.

White House spokesman Robert Gibbs called the first-quarter’s showing a “pretty severe contraction,” but added that some more up-to-date signals on the economy have been more encouraging. “We continue to get, as the president said, some glimmers of hope,” he said.

Even in the face of Wednesday’s weaker-than-expected report, some analysts stuck to predictions that the economy would shrink less in the current April-June period — at a pace of 1 to 2.5 percent — as Obama’s stimulus begins to take hold. Those analysts also continue to hope the economy would start to grow again in the final quarter of this year.

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