Q1 Real GDP Preliminary Estimate – Minor Revisions, Message is Unchanged
Real gross domestic product of the U.S. economy declined at a 5.7% annual rate in the first quarter, marginally smaller than the advance estimate of a 6.1% drop. Consumer spending was weaker than the advance reading (+1.5% vs. +2.2% in the advance report). Liquidation of inventories ($91.4 billion vs. $103.7 billion) and the trade deficit ($302.6 billion vs. $308.4 billion) were both smaller than the first estimate.
Corporate profits increased 3.4% in the first quarter after a 16.5% drop in the last quarter of 2008. The strength in corporate earnings was entirely from a nearly 85% increase in profits from the financial sector, while the profits of the non-financial sector fell 8.6% in the first quarter. The quality and durability of the financial sector profits is unclear, given the fragile state of the financial market.
Going forward, real GDP is expected to post declines in both the second and third quarters. Auto plant shutdowns and resumptions are most likely to exaggerate the projected decline and increase in headline GDP in the third and fourth quarters of 2009.
Frozen Credit Markets Have Made Noteworthy Progress
Frozen credit markets that are the heart of the current global economic crisis have made noteworthy progress. The most significant improvement is at the short and least risky end (see chart 3 and chart 4). At the most risky end, the spread between junk bonds and 10-year Treasury note yield has narrowed substantially (see chart 5) but more is needed to match the situation that prevailed prior to the onset of the crisis in August 2007. Yields on securities backed by credit card and auto loan receivables are declining (see chart 6). For now, the FOMC should be pleased to the extent that credit market spreads are not widening. That said, the financial market situation remains wobbly, but markedly less than it was in the early part of the year.
