Economy shrinks at 5.5% rate

Despite narrower revision, the broadest measure of the nation's economic activity posts second steepest decline in 27 years.

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By Catherine Clifford, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- The U.S. economy shrank at an annual pace of 5.5% in the first quarter, the government said Thursday, a slower pace of decline than previously reported but still the second largest quarterly drop in 27 years.

Economists had expected a 5.7% drop, according to a consensus estimate from Briefing.com.

The first quarter of 2009 marked the third quarter in a row that the economy 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%.

The government initially reported in April that gross domestic product -- the broadest measure of the nation's economic activity -- fell at an annual rate of 6.1% in the first quarter. In its first revision, the government said that GDP declined at an annual pace of 5.7%.

Each quarter, the government revises the GDP twice. Thursday's report marked the final revision.

Inventories, imports: The decline in GDP was less severe than initially reported because of a downward revision to imports and an upward revision to inventory investments, the Commerce Department said. If the economy is spending less on another country's goods and spending more to build its own stockpiles, then productivity is higher, working to pump up the GDP.

Imports of goods and services decreased 36.4% in the first quarter, a sharper decline than the 34.1% drop in imports that was previously reported.

Business inventories fell by $87.1 billion in the first quarter, a less severe drop off than the $91.4 billion decrease reported in the first revision. As a result, the subtraction to the annual rate of GDP growth was 2.2 percentage points, rather than 2.34. Businesses cut their inventory levels in the face of falling demand.

The drawdown in inventories will prove to be a catalyst for production in coming quarters, said John Silvia, chief economist at Wachovia. "The key going forward is that we have cleared out a lot of extra inventories."

Exports, personal spending: A downward revision to exports and personal consumption counteracted the stronger numbers on imports and inventory investments, according to the government report.

Exports plunged 30.6% in the first quarter, a more severe drop than the 28.7% drop reported in the previous revision.

The growth in consumer spending was revised down to 1.4% from the previously reported 1.5%. But the fact that the percentage remained positive was "reassuring to everyone," according to Silvia.

Looking forward: Silvia said he still expected a decline in second-quarter GDP, although it will be less negative than the first quarterm saying production shutdowns in the auto industry have been too severe to allow the economy to rebound.

"I think the third quarter that will be the start of the economic recovery, not the second quarter," he said.

One hint of future growth in the first-quarter report was corporate profits, which were up 1.4% after being down 10.7% in the fourth quarter of last year.

"Companies that make money tend to hire workers," said Silvia.  To top of page

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