GDP Probably Shrank as Companies Cut Back: U.S. Economy Preview

By Bob Willis

April 26 (Bloomberg) -- The U.S. economy probably plunged again in the first quarter, reflecting a drop in inventories that may set the stage for a return to growth later this year.

Gross domestic product shrank at a 4.7 percent annual pace after contracting at a 6.3 percent rate in the last three months of 2008, according to the median estimate of economists surveyed by Bloomberg News ahead of a Commerce Department report April 29. Figures from the Institute for Supply Management on May 1 may show manufacturing shrank at a slower pace this month.

The Commerce report, coming on the second day of the Federal Reserve’s two-day meeting, may show consumer spending climbed, halting its biggest slide in almost two decades. Since their March meeting, Fed policy makers have started buying long- term government bonds and launched a program to revive lending in a bid to keep consumers from retrenching again.

“The more forward-looking you are, the better the world looks,” said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. in New York. “Almost half of the drop in GDP is due to a collapse in inventories, and once they fall far enough, production has to rise back up to meet sales.”

Data in recent weeks, including signs of stability in home sales, residential construction and demand for business equipment, signal the world’s largest economy may contract at a slower pace this quarter. Finance chiefs from the Group of Seven nations last week predicted a “weak” economic recovery will start to take hold in coming months as evidence mounts that the worst of the recession is over.

Manufacturing

Manufacturing, as well as housing, may be descending at a slower pace. The Institute for Supply Management’s factory index may rise to 38.3 for April from 36.3 the prior month, according to economists surveyed. While a reading less than 50 still signals contraction, the improvement would be the fourth in a row.

Factory orders, due from Commerce on May 1, probably fell 0.6 percent in March, after a 1.8 percent gain the prior month, according to the survey median.

Companies including General Motors Corp. have been slashing output to curb inventory as demand at home and abroad dropped. The International Monetary Fund last week said the world economy would shrink 1.3 percent this year, its worst performance World War II.

General Motors and Chrysler LLC are threatened with bankruptcy as sales have plummeted since credit markets seized up last year. GM will idle 15 North American assembly plants for at least a week from mid-May through July, a person familiar with the plans said last week.

Ford Outlook

Ford Motor Co., working to avoid a federal bailout, last week posted a first-quarter loss that beat analysts’ estimates.

“We’re not quite sure where the bottom is,” Ford’s Chief Executive Officer Alan Mulally said in an April 24 Bloomberg Television interview. “But we believe with the stabilization of the banks, freeing up the credit, and the stimulus packages we have, both monetary and fiscal, that we’re going to see an uptick in the third and fourth quarter.”

Declines in business investment joined falling inventories in dragging down the GDP last quarter, economists said. The drop in stockpiles may be the biggest since quarterly records began in 1990, according to a forecast by economists at Barclays Capital.

The gain in consumer spending and a smaller trade deficit as imports plunged prevented the economy from shrinking even more, according to Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado.

A report from Commerce on April 30 may show personal spending fell 0.1 percent in March after a 0.2 percent gain the prior month, according to the survey median. Personal income probably fell 0.2 percent for a second month, reflecting the weakening job market.

Economists projected measures of consumer confidence, from Reuters/University of Michigan on May 1 and from the New York- based Conference Board on April 28, probably improved in April.

Finally, the S&P/Case Shiller index of home prices in the 20 metropolitan areas, also due April 28, may show property values are also dropping at a slower pace.

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