Economy's fall still bad -- even if less steep

[May 29, 2009]  WASHINGTON (AP) -- The economy took a steep tumble at the start of this year, though it may not turn out to be quite as grim as the government first thought.

The Commerce Department is set to release a report Friday that's expected to show the economy shrank at an annualized rate of 5.5 percent from January to March. If Wall Street analysts' forecasts are correct, it would mark a small improvement from the 6.1 percent annualized first-quarter drop the government initially estimated a month ago.

Either figure, though, would underscore the grim toll the recession, which started in December 2007 and is now the longest since World War II, has had on the country. Businesses have ratcheted back spending and slashed 5.7 million jobs to survive the fallout. Financial firms have taken huge losses on soured mortgage investments. Banks and other companies have been forced out of business. Home foreclosures have soared.

"When you take a fall that big, it still hurts," said Stuart Hoffman, chief economist at PNC Financial Services Group.

The recession struck with brutal force in the fall as the financial crisis intensified, causing the economy to contract at a staggering 6.3 percent pace, the worst in a quarter-century.

Milder cutbacks in U.S. exports and in spending on commercial construction help explain the forecasts for a slightly smaller contraction in the first quarter.

The government makes three estimates of the economy's performance for any given quarter. Each estimate of gross domestic product is based on more complete information. The third one will be released in late June. GDP, which measures the value of all goods and services produced in the United States, is the best gauge of the nation's economic health.

Even if the first-quarter figure is revised to show the economy contracted at a 5.5 percent, slightly better than the 6.1 percent first estimated, it will still mean that the economy was in a free-fall at the start of the year.

Economists are hopeful that the economy isn't shrinking nearly as much in the April-to-June quarter as the recession eases its grip. Forecasters at the National Association for Business Economics, or NABE, predict the economy will contract at a 1.8 percent pace.

Other analysts think the economic decline could be steeper -- around a 3 percent pace. Some think it could be less - about a 1 percent pace.

Federal Reserve Chairman Ben Bernanke and NABE forecasters say the recession will end later this year, barring any fresh shocks to the economy. NABE forecasters predict the economy could start growing again in the third or forth quarter.

President Barack Obama's stimulus package of increased government spending and tax cuts, along with aggressive action by the Fed to spur lending, should help revive the economy.

Still, both the Fed and private economists caution that any recovery will be lethargic and that unemployment - now at 8.9 percent, the highest in 25 years -- will continue to march upward in the months ahead.

Many economists say the jobless rate will hit 10 percent by the end of this year. Some say it could rise as high as 10.7 percent in the second quarter of next year before making a slow descent.

One of the forces that plunged the country into a recession was the financial crisis that struck with force last fall and was the worst since the 1930s. Economists say recoveries after financial crises tend to be slower.

In the government's initial estimate of first-quarter GDP, consumers snapped back to life after having slashed their spending at the end of 2008 by the most in 28 years. Some economists say Friday's revised GDP reading could show spending was a bit weaker than the 2.2 percent growth rate first calculated.

Looking ahead, consumers likely will stay cautious given rising unemployment. That would make for a tepid economic turnaround.

Risks abound, though, such as relapses in credit and financial markets. An upward march in mortgage rates. And troubles in the automotive sector, spreading to other manufacturers and suppliers, analysts say.

[Associated Press; By JEANNINE AVERSA]

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.