INSTANT VIEW: Economy shrinks 6.1 pct in Q1

NEW YORK (Reuters) - The U.S. economy contracted at a steeper-than-expected pace in the first quarter, weighed down by sharp declines in exports and business inventories, according government data on Wednesday that showed the economy was still deep in recession.

KEY POINTS: * Gross domestic product, which measures total goods and services output within U.S. borders, dropped at a 6.1 percent annual rate in the first quarter, the Commerce Department said, after shrinking 6.3 percent in the fourth quarter. * Analysts polled by Reuters had forecast GDP falling at a 4.9 percent rate in the January-March quarter. * Output has declined for three straight quarters for the first time since 1974-1975. * The advance report from the Commerce Department showed business inventories plummeted by a record $103.7 billion in the first quarter, as firms worked to reduce stocks of unsold goods in their warehouses. * Excluding inventories, GDP contracted 3.4 percent. * 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. * 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.

COMMENTS:

NEAL SOSS, CHIEF ECONOMIST, CREDIT SUISSE, NEW YORK:

"There's not much question that on many dimensions this is the most severe economic shock of the post-war period. These back to back declines in GDP have been enormous. Having said that, vigorous efforts by monetary and fiscal authorities have taken away the risk of a financial collapse."

RICHARD LEE, MANAGING DIRECTOR OF FIXED INCOME, WALL STREET ACCESS, NEW YORK:

"You have much better sentiment in the stock market. The bond market reacted to that. The GDP number is not drastically worse than the previous quarter. You also have the FOMC statement coming out today. You will have bonds bouncing around until the statement.

"When you look the economic numbers, they are playing a secondary role because much of them have been priced in. Treasuries are reacting more to how much Treasuries the Fed is buying and how the stock market is doing."

OMER ESINER, FOREX MARKET ANALYST, RUESCH INTERNATIONAL, WASHINGTON:

"The headline number is much worse than expected, but it's surprising to see a 2.2 percent increase in consumer spending, which is much better than expected. So while clearly a disappointing number, the surprise jump in consumer spending is mitigating some of the negative impact from the data. That's why we're seeing the dollar benefit a little bit against most of its major rivals except the yen. But the reaction is a little bit more muted than you would expect given the magnitude of the decline in the headline number."

DAVID RESLER, CHIEF ECONOMIST, NOMURA SECURITIES INTERNATIONAL, NEW YORK:

"I am really surprised at the headline numbers but less surprised when you look at the details. Final sales were down 3.4 percent, that is kind of what we thought they would be. The trade accounts contributed more than we thought, and so did consumer spending. It is very difficult to know on the day of the GDP report what the trajectory of consumer spending is. We (Nomura) had a slight drop occurring in consumer spending in March but it looks like we might have had an increase in March. If that is the case we could have some positive momentum going into the second quarter."

KEITH HEMBRE, CHIEF ECONOMIST, FAF ADVISORS, MINNEAPOLIS:

"This is pretty in line with my expectations but the consensus had showed less of a drop. The inventory is the bigger contributor to the drop in GDP than expected and trade added a lot more (of a drag). The two are related. The government spending fundamentals look pretty weak with the drawdown in defense spending and state and local spending.

"We should see a diminishing effect from inventory on GDP going forward. We should see a modest growth in the second half from the stimulus program."

DOUG BENDER, MANAGING DIRECTOR, MCQUEEN, BALL & ASSOCIATES, BETHLEHEM, PENNSYLVANIA:

"The GDP data is in line with where the fourth quarter was, which we knew was weak. We have had two quarters of very poor performance.

"GDP is in the rear view mirror. We know the first quarter was still very weak. But the way the bond market will trade today will be more influenced by what the Treasury announces in terms of its refunding and what the Fed statement says."

MICHAEL DARDA, CHIEF ECONOMIST, MARKET STRATEGIST, MKM PARTNERS LLC, GREENWICH CT:

"It's not as bad as it looks. The headline figure shows a dramatic decline, but that was driven by a decline in government spending, which we know is temporary. It's worth noting that consumption was positive and better than expected.

"I think that the last quarter of last year and this quarter will mark the largest declines we're likely to see in this recession, and beyond this the decline will start to disappear. 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."

MARKET REACTION: STOCKS: U.S. stock index futures pare gains after bigger-than-expected contraction in Q1 GDP. BONDS: U.S. Treasury debt prices steady. DOLLAR: U.S. dollar gains versus euro.