Seeds Of Revival

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GDP: The economy contracted a "worse than expected" 6.1% in the first quarter of 2009, showing we are still in a deep recession. But things are better than they look — and likely will get more so as the year goes on.

You can be forgiven for thinking us crazy for saying that. After all, the media are filled with news of impending doom, and pundits tell us it could go on for years. Heck, we've heard some predictions that our current economic ills will last a generation or more.

But they won't. Yes, things are bad. But the fact is, even the nasty 6.1% drop in first-quarter GDP — following an even nastier 6.3% plunge in the fourth quarter — shows signs of a turnaround.

Most prominently, look at consumer spending, which makes up about 70% of GDP. It slowed in last year's final two quarters, but it rose 2.2% in this year's first.

The rebound was boosted by a hefty 9.4% jump in demand for big-ticket durable goods. Indeed, consumer spending rose in almost every segment except food — which fell slightly.

So why did the economy continue its free fall? Five big reasons.

As expected, new home construction plummeted 38%. Government spending also fell — largely due to cuts in defense and spending trims at the state and local level.

Also, business investment and inventories declined at the fastest rates since the end of World War II. Exports to the rest of the world also plunged, thanks to the global recession.

Inventories shrank $103.7 billion in the first three months, the biggest drop since records began in 1947. If not for that massive write-down, the economy would have contracted just 3.4%.

But that's actually positive news — because inventories have been slashed to the bone at most companies. So has capital investment.

With a consumer comeback in the works, businesses may have to move fast later this year to expand output and restock their depleted shelves. This could get the economy moving again, though for how long and how strong is open to question.

Even the Fed, which is about to buy $1.7 trillion in bad debt from banks, said in its most recent reading on the economy released Wednesday that the recession is starting to ease.

This optimism is bolstered by the April IBD/TIPP Poll, which rose 8.4% to 49.1, just below the 50 level that signals optimism. A look at IBD's stock market indexes shows many of the leaders since the March 9 bottom have a consumer tinge.

The Nasdaq index in a bit over a month and a half has surged 24%. Total market value has jumped $1.9 trillion in that time. Clearly, the stock market, our best leading indicator, expects a recovery.

We mention this not to be Pollyannish about the economy. We aren't. But we're seeing little gems like the following, tucked into a recent AP story on the GDP drop: "Some analysts stuck to predictions that the economy would shrink less in the current April-June period . . . as Obama's stimulus begins to take hold."

There are many reasons the economy might grow. Unfortunately, the $787 billion stimulus passed by Congress isn't one of them. Simply put, not enough money emerging from it will make any difference in the second quarter.

(Fed action is another question. The central bank has already pushed more than $1 trillion into the financial system, and stands ready to add an additional $1.7 trillion.)

So recovery is likely. Our guess is the third quarter, but who really knows? One thing is clear: When it happens it'll be thanks to the sacrifices businesses, workers and investors have already made.

Other than get in the way, the government has done little.

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