The US economy contracted at a surprisingly sharp 6.1 per cent rate in the first quarter as exports and business inventories plummeted.
The drop in gross domestic product, reported by the Commerce Department today, was much steeper than the 4.9 per cent annual rate expected by economists and followed a 6.3 per cent decline in the fourth quarter.
GDP, which measures total goods and services output within US borders, has now dropped for three straight quarters for the first time since 1974-1975.
The data came as the Federal Reserve resumed a regular two-day meeting. The Fed, which has cut interest rates to almost zero and pumped about a trillion dollars into the economy to try and break its downward spiral, is expected to leave policy unchanged at the meeting.
US stock index futures pared gains after the GDP report, while government bond prices were little changed.
“There won't be positive growth until the second half of the year probably, but the fall in the second quarter, if it's negative at all, will be far smaller,” said Michael Darda, chief economist at MKM Partners in Greenwich Connecticut.
The advance report from the Commerce Department showed business inventories plunged by a record $103.7 billion in the first quarter, as firms worked to reduce stocks of unsold goods in their warehouses.
That sliced 2.79 percentage points from the overall GDP figure. Excluding inventories, GDP contracted 3.4 per cent.
But the sharp drawdown in inventories is good news as it suggests that manufacturers and retailers have reduced the stock of unsold merchandise to manageable levels and could be instrumental in pulling the economy out of recession.
Recent manufacturing surveys by the regional Federal Reserve Banks have shown an improvement in new orders.
“We should see a diminishing effect from inventory on GDP going forward,” said Keith Hembre, chief economit at FAF Advisors in Minneapolis.
Exports collapsed 30 per cent, the biggest decline since 1969, after dropping 23.6 per cent in the fourth quarter. The decline in exports knocked off a record 4.06 percentage points from GDP.