U.S. GDP contracts less in Q1, demand still soft

WASHINGTON (Reuters) - The U.S. economy shrank slightly less in early 2009 than previously thought, the government reported on Thursday, though there was widespread weakness in activity and demand was soft.

Gross domestic product, which measures total output within U.S. borders, dropped at a 5.5 percent annual rate in the first quarter after shrinking 6.3 percent in the fourth quarter of last year and 0.5 percent in the third quarter.

The GDP reading was the final one for the first quarter. The Commerce Department initially said it contracted 6.1 percent, then revised that to 5.7 percent and finally to a 5.5 percent fall. GDP is expected to decline again in the current quarter ending June 30 though less severely than in the first quarter.

The GDP report reflected an economy still deep in recession as the year began, though the Paris-based Organization for Economic Cooperation and Development predicted this week the U.S. downturn will bottom out this year and be followed by a soft recovery in 2010.

Consumer spending, which fuels two-thirds of U.S. economic activity, increased at a downwardly revised 1.4 percent rate instead of the 1.5 percent previously estimated. Weak job markets and falling home prices are expected to dampen spending for some time.

Partly accounting for the revised GDP figure, the department said companies cut inventories at a slightly less vigorous rate in the first quarter than thought previously. Business inventories declined at an $87.1 billion rate instead of $91.4 billion, which meant they subtracted less from growth.

Reflecting the weak pace of global activity, exports plunged at a 30.6 percent rate in the first quarter instead of 28.7 percent estimated a month ago. That was the steepest drop in foreign sales in 40 years. Imports dropped at a 36.4 percent rate, the steepest since the summer of 1947.

The department said the drop in exports cut 4.16 percentage points from GDP.

Overall business investment plunged at a record 37.3 percent rate during the first quarter, while spending on homebuilding fell 38.8 percent for its biggest quarterly tumble since early 1980.

Nonetheless, corporate profits grew at a 1.4 percent rate during the first quarter, slightly better than the 1.1 percent rise estimated a month ago, after falling 10.7 percent in the final three months of last year.

(Editing by James Dalgleish)