Fallout: The Financial Crisis

Glimmers of hope with GDP contraction

Jeremy Hobson Apr 29, 2009
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Fallout: The Financial Crisis

Glimmers of hope with GDP contraction

Jeremy Hobson Apr 29, 2009
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TEXT OF STORY

Kai Ryssdal: The word of the day on this Wednesday is unchanged. That’s the headline from the Federal Reserve. After two days of talking about it, the Fed is going to leave its federal-funds rate steady at a quarter of 1 percent.

The other thing that was essentially unchanged today was the rate at which the economy is contracting. Gross domestic product shrank at a rate of 6.1 percent in the first quarter. That’s right in line with where things were at the end of last year. And it sounds pretty bad, I know. But as Marketplace’s Jeremy Hobson reports now from New York, investors who dug a little deeper into the data are seeing some promise.


JEREMY HOBSON: Healthy economies are supposed to grow. And this makes three straight quarters of shrinkage. So what on earth could make a 6.1 percent drop in the size of the U.S. economy sound hopeful?
I asked Guy Lebas, chief fixed income strategist at Janney Montgomery Scott.

GUY LEBAS: I think the most notable one is really that consumer spending was remarkably robust, it’s up 2.2 percent in the quarter. And for a quarter when people are screaming about lack of auto purchases, lack of appliance purchases, that’s really pretty remarkable.

Consumer spending makes up 70 percent of Gross Domestic Product, after all. And it’s a sign of overall confidence, which — as FDR said — is essential. But then how could the economy be shrinking? Here’s economist Josh Bivens at the Economic Policy Institute.

JOSH BIVENS: What stands out is just the complete collapse of every category of private investment.

For instance, investment in housing fell by 38 percent. Business spending on everything from equipment to software to buildings fell by a similar amount. On the other hand, the amount of inventory at U.S. companies fell as well — catching up with consumer demand — which may be good in the long term. What does Bivens think about that hopeful consumer spending number?

BIVENS: If it was a trend, I think it might be a good thing. I’m a little dubious that it’s a trend.

He says that’s because the personal savings rate is still climbing. So if we have any hope of a better GDP number next quarter, Bivens says it’ll be because of government spending, when that stimulus package finally kicks in.

In New York, I’m Jeremy Hobson for Marketplace.

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