Highlights
First quarter GDP contracted more than expected but most of the weakness was in lower inventories. The consumer was stronger-than-expected. Overall, spending is not as weak as broad GDP. The Commerce Department's initial estimate for first quarter GDP dropped an annualized 6.1 percent, and followed a 6.3 percent contraction the prior quarter. The first quarter was worse than the consensus forecast for a 5.0 percent decline.

The first quarter decrease was led by a $103.7 billion cutback in inventories, followed by a 3.9 percent annualized drop in government spending. The fall in government purchases was due to declines in both defense spending and state & local government spending. Housing continued to fall sharply along with business fixed investment. On the positive side, consumer spending picked up to a 2.2 percent gain after a 4.3 percent decrease in the fourth quarter. Net exports also improved.

But in terms of demand, real final sales of domestic product fell only 3.4 percent in the latest quarter (GDP less change in private inventories) while real final sales to domestic purchasers declined 5.1 percent annualized (purchases by U.S. residents of goods and services wherever produced).

On the inflation front, the GDP price index jumped 2.9 percent, after a 0.5 percent annualized increase the prior quarter. The market had projected a 1.8 percent increase. The headline PCE index slipped 1.0 percent, following a 4.9 percent decline in the fourth quarter. Core PCE inflation firmed with a 1.5 boost, after nudging up 0.9 percent annualized in the fourth quarter.

Year-on-year growth for real GDP contracted by 2.6 percent after dropping 0.8 percent in the fourth quarter.

The bottom line is that the worse-than-expected decline was due to inventory adjustments. The consumer is doing better than expected. This is good news. If the consumer is holding up, the economy will not fall off a cliff. The report should be favorable to equities and also firm interest rates due to better-than-expected consumption. Foreign exchange markets were mixed on the news.

Market Consensus Before Announcement
GDP ended the final quarter of 2008 with a sharp 6.2 percent annualized decline. Analysts are expecting even worse news for the first quarter - but hold onto the belief that the first three months of the year were the worst of the recession. Along with weak economic activity, inflation was subdued in the final quarter of last year as the GDP price index rose a mere 0.5 percent annualized - also due to declining oil prices.

2009 Release Schedule

Released On: 1/30 2/27 3/26 4/29 5/29 6/25 7/31 8/27 9/30 10/29 11/24 12/22 Released For: Q4:08 Q4:08 Q4:08 Q1:09 Q1:09 Q1:09 Q2:09 Q2:09 Q2:09 Q3:09 Q3:09 Q3:09   A: Advance P: Preliminary F: Final