Economy's Sharp Contraction Deflates Hopes That Decline Was Ending

The nation's gross domestic product shrank by 6.1 percent, worse than most economists predicted.

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Today's report on the U.S. economy managed to make even analysts' predictions of a 4.6 percent decline in gross domestic product look optimistic, underlining the reality that the economy will continue to overshadow other issues on the Obama administration's plate—even swine flu—for some time to come.

The economy shrank at an annual pace of 6.1 percent from January to March, the Commerce Department reported this morning. That's a bit better than the 6.3 percent rate recorded in the last quarter of 2008, but it undermines economists' predictions that the rate of economic decline had begun to slow significantly. The report also shows that the U.S. economy suffered its worst six months since 1957-1958.

The drop occurred despite a rise in consumer spending, which accounts for about 70 percent of the economy. Spending rose by a 2.2 percent annual rate in the past quarter, the fastest pace in two years. Offsetting that good news, however, was a drop in both inventories and the housing market. Exports also fell, but imports fell even further.

Analysts say that the drop in inventories, despite dragging down the GDP, could have a silver lining. It means that businesses were able to clear their backlogs of goods that built up when demand dropped. As demand increases, therefore, they'll have to increase production and hire more workers.

The report arrived just as the Federal Reserve is wrapping up its two-day meeting on the economy. The bank is expected to decide to keep its interest rates down between zero and 0.25 percent, but it could decide to purchase more treasury securities.