The Commerce Department reported today that the economy contracted at an annual rate of 6.1 percent in the first quarter, a marginal improvement from the 6.3 percent decline in the fourth quarter of last year. The sole reason for this improvement was that consumer spending (which accounts for 70 percent of the economy) actually rose at a 2.2 percent annual clip in the first quarter. Outside of consumer spending, the rest of the economy declined at an annual rate of 7.6 percent in the first quarter, the second largest quarterly drop in over sixty years.
Back in the fourth quarter, business investment, housing, and exports all declined at annual rates in excess of 20 percent. Based on today’s report, the pace of these declines all accelerated to over 30 percent in the first quarter. This explains why the decline in manufacturing production also accelerated in the first quarter. Despite an improvement in consumer spending, other markets for manufacturing goods, both here and abroad, deteriorated.
Going forward, conditions are likely to reverse themselves somewhat. The surprising increase in consumer spending in the first quarter was fueled by one-time improvements in consumer incomes, such as the large increase in the cost of living adjustment for Social Security that went into effect in January. Such a large increase in coming quarters is unlikely. At the same time recent data suggest that the housing market and business investment demand are starting to firm up, indicating that the large decreases experienced in these parts of the economy should start to moderate in coming quarters.