US economy continues sharp slowdown in Q1

The US economy shrank much more than forecasters had been expecting in the first quarter but investors were cheered by the massive run down in inventories and a better than hoped for reading on consumer spending.

In the first three months of the year, the US economy shrank by 6.1% - just better than the 6.3% contraction in the last quarter of 2008, but much more than the 4.7% that the market had predicted.

This was the first time in over thirty years that US output has contracted in three consecutive quarters.

But this failed to upset investors keen to get the recent rally back on track. Instead they focused on the strong consumer contribution and hopes increased government spending and the rundown in inventories will mean GDP will contract less in future quarters.  

The DJIA opened up 57.67 points, or 0.72%, at 8,074.62 and the S&P 500 was 7.38 points higher at 862.54 with all eyes now on today’s statement from the Federal Reserve's rate-setting committee, the FOMC.

'The US Federal Reserve is expected to keep interest rates unchanged, but investors are awaiting comments regarding early signs of a recovery in the US,' said Manoj Ladwa, derivatives trader at ETX Capital.

Certainly today's personal consumption figures may muster some upbeat comments from the panel.

'A closer examination of the figures reveals that consumer spending rebounded strongly from its worst quarter since 1980 by moving to growth of 2.2% from a contraction of 4.3%,' said Arek Ohanissian, economist at the Centre of Economics and Business Research.

The market had been expecting growth of around 0.9%.

Ohanissian said the contraction would have been much worse if it had not been for the boost from personal consumption as gross private investment contracted by 51.8% after a 23% fall in the earlier quarter and government spending fell by 3.9% – the first fall since 2005.