Economy sinks at a 5.7% pace in 1Q

The economy did not shrink as much as originally believed during the first quarter, the government reported Friday.

The gross domestic product, the broadest measure of economic output, fell at a 5.7% annual rate from January to March, according to the Commerce Department, which had initially estimated that the economy shrank at a 6.1% annual rate.

Even with the less-steep decline, the new data made clear that the economy remained basically in free fall at the start of the year, with business inventories, investment levels and exports all plummeting.

Analysts believe the economy has continued to shrink in the second quarter, but at a more manageable pace.

“All the incoming data suggest that the rate of decline in economic activity is decelerating,” Nariman Behravesh, an economist with IHS Global Insight, said in a research note.

The report bolsters hope that the economy not only is shrinking at a slower rate in the April-to-June period but also perhaps won’t contract at all in the third quarter, said Phil Orlando, chief equity market strategist at Federated Investors in New York.

“We believe we are establishing a trend here,” he said. “Things will continue to be positive.”

In the first quarter, the government said, businesses did not cut back on inventories quite as quickly as originally estimated, nor did exports fall as steeply. The new data affirmed that consumer spending stabilized in the early months of the year, with personal consumption expenditures rising at a 1.5% annual rate.

The government, however, said that although consumer spending on nondurable goods rose at a healthy 9.6% annual rate, it was not as healthy as first estimated.

The data continued to show a near-collapse in business investment, with spending on equipment and software falling at a 33.5% annual rate, and investment in structures falling at a 42.3% rate.

Corporate profits rose by $42.6 billion during the quarter, as companies cut costs aggressively.

But that followed a $250-billion decline in profits in the final months of 2008.

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Merle and Irwin write for the Washington Post.