The U.S. economy contracted at a surprisingly sharp 6.1 percent rate
in the first quarter as exports and business inventories plummeted.

The drop in gross domestic product, reported by the Commerce
Department on Wednesday, was much steeper than the 4.9 percent annual
rate expected by economists and followed a 6.3 percent decline in the
fourth quarter.

GDP, which measures total goods and services output within U.S.
borders, has now dropped for three straight quarters for the first time
since 1974-1975.

The data came as the Federal Reserve resumed a regular two-day
meeting. The Fed, which has cut interest rates to almost zero and
pumped about a trillion dollars into the economy to try and break its
downward spiral, is expected to leave policy unchanged at the meeting.

U.S. stock index futures pared gains after the GDP report, while government bond prices were little changed.

There won't be positive growth until the second half of the year
probably, but the fall in the second quarter, if it's negative at all,
will be far smaller, said Michael Darda, chief economist at MKM
Partners in Greenwich Connecticut.

The advance report from the Commerce Department showed business
inventories plunged by a record $103.7 billion in the first quarter, as
firms worked to reduce stocks of unsold goods in their warehouses.

That sliced 2.79 percentage points from the overall GDP figure. Excluding inventories, GDP contracted 3.4 percent.


But the sharp drawdown in inventories is good news as it suggests
that manufacturers and retailers have reduced the stock of unsold
merchandise to manageable levels and could be instrumental in pulling
the economy out of recession.

Recent manufacturing surveys by the regional Federal Reserve Banks have shown an improvement in new orders.

We should see a diminishing effect from inventory on GDP going
forward, said Keith Hembre, chief economist at FAF Advisors in

Exports collapsed 30 percent, the biggest decline since 1969, after
dropping 23.6 percent in the fourth quarter. The decline in exports
knocked off a record 4.06 percentage points from GDP.

Investment by businesses tumbled a record 37.9 percent in the first
quarter, while residential investment dived 38 percent, the biggest
decline since the second quarter of 1980.

However, there were some bright spots in the report. Consumer
spending, which accounts for over two-thirds of U.S. economic activity,
rose 2.2 percent, after collapsing in the second half of last year.

Consumer spending was boosted by a 9.4 percent jump in purchases of
durable goods, the first advance after four quarters of decline.

The Commerce Department said the government's $787 billion rescue
package of spending and tax cuts, approved in February, had little
impact on first-quarter GDP.

Part of the stimulus package is designed to bolster state and local
and government spending, which fell at a 3.9 percent rate in the first
quarter, the largest decline since the second quarter of 1981.

A separate report showed U.S. home loan applications fell last week
to the lowest level since mid-March, even as mortgage rates clung to
record lows.

The Mortgage Bankers Association said its mortgage applications
index, which reflects demand for both purchase loans and refinancings,
fell 18.1 percent.