WASHINGTON — The U.S. economy contracted at a swift pace in the beginning of 2009 as sharp drops in business spending, inventories and exports more than offset the biggest increase in consumer spending in two years.
Gross domestic product, the broadest gauge of U.S. economic activity, fell at a seasonally adjusted annual rate of 6.1% in the January-March quarter after dropping at a 6.3% rate in the fourth quarter and posting a 0.5% decline in the third quarter, the Commerce Department said. It was the first time GDP contracted for three consecutive quarters since 1974-1975.
The first-quarter decline was worse than estimated by economists. But some said there are positives in the report that suggest the news for the second quarter will be better.
"Overall, horrible," High Frequency Economics chief economist Ian Shepherdson said in a note to clients. "Q2 will be less bad."
Said Wachovia chief economist John Silvia, "Ahead is rising demand and recovery at a slower, but still positive, pace."
Contributing to the positive outlook was consumer spending, which rose at a 2.2% annual rate in the January-March quarter, biggest increase since the first quarter 2007.
Insight Economics President Steven Wood said in addition to another rise in consumer spending, the second quarter will likely see increased government spending as stimulus money is spent.
"Although there have been large back-to-back declines in economic activity, the composition of the most recent decline is actually favorable for economic activity" in the second and third quarters, he said. "Any declines should be much smaller, and there is a possibility that at least one of those quarters could register small positive growth."
Still, the gain in consumer spending follows two consecutive quarters of large drops. And consumers are continuing to show caution — the personal saving rate was 4.2% in the first quarter, up from 3.2% at the end of 2008 and the highest in more than a decade.
GDP in the first quarter was down 2.6% from the prior year, biggest drop since 1982, the department said.
The drop was led by a 37.9% plunge in business investment, at an annual rate. That followed a 21.7% drop in the fourth quarter and was the biggest decline since quarterly records began more than 60 years ago.
Exports fell at a 30% rate in the first quarter after declining 23.6% in the fourth quarter, illustrating how a global recession is leading to far fewer orders for U.S. goods. The drop in exports in the beginning of 2009 was the biggest in 40 years.
Housing investment fell at a 38% rate in the first quarter, biggest drop since 1980 and the 13th consecutive quarterly decline.
Also subtracting from GDP in the first quarter was a decline in federal defense and state and local spending. Business inventories posted a sharp decline, something that could actually be a good sign if it means businesses are paring inventories to levels so low that they will need to restock at a rapid pace when demand picks up.
The news came out hours before Federal Reserve policymakers are expected to hold their target for short-term interest rates near zero in a bid to boost an economy that has been in recession since December 2007. Economists in a USA TODAY survey earlier this month predicted the Fed would hold rates near zero for another year.
http://www.usatoday.com/money/economy/2009-04-29-gdp_N.htm
Swine flu updates
The United States has seen its first death from swine flu.
http://frc4u.org/phpbb/index.php?topic=1090.msg1960;boardseen#new
First U.S. Swine Flu Death; Cases Now in 10 States
http://abcnews.go.com/Health/SwineFlu/story?id=7456439&page=1
Egypt orders slaughter of all pigs over swine flu
http://www.breitbart.com/article.php?id=D97S574G1&show_article=1
France says it will request an EU-wide ban on all flights to Mexico, source of the swine flu outbreak.
The move follows confirmation of new cases in Germany, Austria, Britain and Spain. Many, if not all, of those infected have recently been to Mexico.
http://news.bbc.co.uk/2/hi/europe/8024345.stm
Fed Is Said to Seek Capital for at Least Six Banks
April 29 (Bloomberg) -- At least six of the 19 largest U.S. banks require additional capital, according to preliminary results of government stress tests, people briefed on the matter said.
While some of the lenders may need extra cash injections from the government, most of the capital is likely to come from converting preferred shares to common equity, the people said. The Federal Reserve is now hearing appeals from banks, including Citigroup Inc. and Bank of America Corp., that regulators have determined need more of a cushion against losses, they added.
By pushing conversions, rather than federal assistance, the government would allow banks to shore themselves up without the political taint that has soured both Wall Street and Congress on the bailouts. The risk is that, along with diluting existing shareholders, the government action won’t seem strong enough.
“The challenge that policy makers will confront is that more will be needed and it’s not clear they have the resources currently in place or the political capability to deliver more,” said David Greenlaw, the chief financial economist at Morgan Stanley, one of the 19 banks that are being tested, in New York.
Final results of the tests are due to be released next week. The banking agencies overseeing the reviews and the Treasury are still debating how much of the information to disclose. Fed Chairman Ben S. Bernanke, Treasury Secretary Timothy Geithner and other regulators are scheduled to meet this week to discuss the tests.
Options for Capital
Geithner has said that banks can add capital by a variety of ways, including converting government-held preferred shares dating from capital injections made last year, raising private funds or getting more taxpayer cash. With regulators putting an emphasis on common equity in their stress tests, converting privately held preferred shares is another option.
Firms that receive exceptional assistance could face stiffer government controls, including the firing of executives or board members, the Treasury chief has warned.
Today, Kenneth Lewis, chief executive officer of Bank of America, faces a shareholder vote on whether he should be re- elected as the company’s chairman of the board. While Lewis has been at the helm, the bank has received $45 billion in government aid.
‘Out of Our Hands’
Scott Silvestri, a spokesman for Charlotte, North Carolina- based Bank of America, declined to comment on Lewis yesterday. Lewis said earlier this month that the firm “absolutely” doesn’t need more capital, while adding that the decision on whether to convert the U.S.’s previous investments into common equity is “now out of our hands.”
Citigroup, in a statement, said the bank’s “regulatory capital base is strong, and we have previously announced our intention to conduct an exchange offer that will significantly improve our tangible common ratios.”
Along with Bank of America and New York-based Citigroup, some regional banks are likely to need additional capital, analysts have said.
SunTrust Banks Inc., KeyCorp, and Regions Financial Corp. are the banks that are most likely to require additional capital, according to an April 24 analysis by Morgan Stanley.
Bank of America advanced 2.6 percent to $8.36 in German trading and Citigroup climbed 3.5 percent to $2.99. SunTrust slipped 0.2 percent to $13.69 in Germany.
By taking the less onerous path of converting preferred shares, the Treasury is husbanding the diminishing resources from the $700 billion bailout passed by Congress last October.
‘Politically Constrained’
“Does that indicate that’s what the regulators actually believe, or is it that they felt politically constrained from doing much more than that?” said Douglas Elliott, a former investment banker who is now a fellow at the Brookings Institution in Washington.
Geithner said April 21 that $109.6 billion of TARP funds remain, or $134.6 billion including expected repayments in the coming year. Lawmakers have warned repeatedly not to expect approval of any request for additional money.
Some forecasts predict much greater losses are still on the horizon for the financial system. The International Monetary Fund calculates global losses tied to bad loans and securitized assets may reach $4.1 trillion next year.
Geithner has said repeatedly that the “vast majority” of U.S. banks have more capital than regulatory guidelines indicate. The stress tests are designed to ensure that firms have enough reserves to weather a deeper economic downturn and sustain lending to consumers and businesses.
‘Thawing’ Markets
He also said there are signs of “thawing” in credit markets and some indication that confidence is beginning to return. His remarks reflected an improvement in earnings in several lenders’ results for the first quarter, and a reduction in benchmark lending rates this month.
Financial shares are poised for their first back-to-back monthly gain since September 2007. The Standard & Poor’s 500 Financials Index has climbed 18 percent this month, while still 73 percent below the high reached in May 2007.
Finance ministers and central bankers who met in Washington last weekend singled out banks’ impaired balance sheets as the biggest threat to a sustainable recovery. Geithner has crafted a plan to finance purchases of as much as $1 trillion in distressed loans and securities. Germany has proposed removing $1.1 trillion in toxic assets.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aiz06xRmmeOQ&refer=worldwide
FEMA's "Scary Thing"
Agency's web site yanks coloring book depicting 9/11 terror attack
APRIL 29--The Federal Emergency Management Agency has removed a children's coloring book from its web site following criticism over its inclusion of drawings of the September 11 terrorist attack on the World Trade Center. The coloring book, titled "A Scary Thing Happened," is geared towards helping kids "cope with disasters," and was prepared by a Minnesota crisis response team. Until yesterday, the coloring book could be downloaded from the FEMA web site. As seen below, the coloring book's cover montage includes a drawing of one of the Twin Towers on fire as a plane approaches the second building. A similar image, which children could color in, appears on page 12 of the book. If you'd like a copy of the entire 25-page coloring book, click here to download a PDF. The coloring book was created in 2003 for the Freeborn County Crisis Response Team and was illustrated by Marlys Jentoft, a 68-year-old grandmother of 10. In an interview, Jentoft, pictured above, told TSG she was unaware of the recent criticism of the coloring book, but would redo the drawings if asked. Jentoft, who volunteers for the Red Cross and church and crime victims groups, said that she did not give much thought to including the 9/11 images since, "I feel like it was happening in the world and kids saw it. It is life."
http://www.thesmokinggun.com/archive/years/2009/0429091fema1.html
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