U.S. economy shrank at an alarming rate

U.S. GDP fell at an annualized rate of 6.1% in the first quarter of this year according to data released on Wednesday April 29th.

The world’s largest economy has now contracted for three quarterly periods in a row. The fall was bigger than most had expected, and puts the cumulative shrinkage so far during this recession on a par with those in the downturns of 1973-75 and 1981-82, the worst of the post-war period.

Much of the fall was due to businesses slashing inventories to cope with drops in sales. Consumer spending actually rose by 2.2% at an annual rate, led by rising purchases of cars and other durable goods after a disastrous 2008, but much of this was offset by a sickening plunge in business investment, which fell at a 38% annual rate, the steepest on record. That is the steepest decline since records began, beating the old record set back in 1952, according to Morgan Stanley.

US consumer prices fall for first time since 1955

US consumer price index (CPI) slipped 0.4% below its year-earlier level in March and recorded their first 12-month decline in over 50 years, since 1955, with energy prices down 23% over 12 months.

The "core" CPI, which excludes food and energy prices, was up 1.8%.

Falling prices would make it tougher for borrowers to pay off debt, leading to even more defaults and even tougher lending standards amid continuing credit woes.

Unemployment rate jumps to a 26-year high 8.5%

U.S. unemployment rate in March jumped to a 26-year high 8.5% from 8.1% in February, while 663,000 jobs lost in the month, a sign that the recession is getting worse.

The total number of jobs lost since the recession began in December 2007 is 5.1 million. Of the 5.1 million jobs lost, 72% have disappeared in only the past six months.

The Fed pumps $1.2 trillion to the economy

The U.S. central bank would pump $1.2 trillion into economy to combat the worst global slowdown in decades, the Fed announced Wednesday, Mar. 18. The central bank’s plans to buy up to $300 billion long-term government bonds and some $750 billion in mortgage-backed securities, which would help revive the U.S. sagging housing market.

The Fed hasn't set out to influence long-term interest rates by buying long-term bonds since the 1960s.

By buying Treasurys and lifting the size for its programs to buy mortgage-backed securities and agency bonds, the Fed will boost money supply available for borrowing to combat the recession. The moves aims to lower mortgage rates and reduce the premium companies have to pay over the federal government to secure funding from the capital markets. The lower borrowing costs for consumers and companies are expected to prop up demand and spending in the U.S.

The Federal Reserve has been moving toward this quantitative easing policy since mid-September 2008. The policy is essentially required the Fed to print money to put the financial system back on its feet and jump-start the economy. But economists warned that such efforts could lead to long-term inflation, and could drive down the value of the dollar.

The Fed’s Open Market Committee also announced it would keep interest rates near zero, and said it expected its target interest rates to remain exceptionally low “for an extended period.” Interest rates in the U.S., the fed-funds target rate, has been in the range of 0%-0.25%. In all major economies, the interest rates have been pushed to ultra-low levels.

Moments after the Federal Reserve announced its plans, yields on the benchmark 10-year Treasury note posted their biggest drop in years as investors welcomed a big new buyer to the market for government debt. The central bank’s decision to fire up $1.2 trillion continued to sweep over world financial markets on Thursday, pushing the price of government bonds higher and dragging down the value of the dollar.

The Fed’s plan follows similar actions taken by central banks across the globe. The Bank of England is buying government securities, while the Swiss is selling francs to try to push down the value of their currency. The Bank of Japan announced Wednesday that it would also expand its purchase of government debt by almost 30 percent.

The markets are responding favorably to the U.S. Federal Reserve's bold $1.2 trillion spending plan. On Wall Street, stocks advanced on the day, but slipped on the next day. World stock markets were mostly higher the next day, Mar. 19.

The dollar has been sold off aggressively across the board in the wake of the Federal Reserve's decision. The dollar extended its decline against the euro, the yen and other major currencies on Thursday.

U.S. unemployment at 25-year high, 12.5 million people jobless

The U.S. unemployment rate rose to a 25-year high of 8.1 percent in February as employers shed 651,000 jobs in the deepening recession, government data showed on Friday, Mar. 6. A total of 12.5 million people were unemployed in February, the Labor Department said.

February's jobless rate was the highest since December 1983 and was a half percentage point above January's 7.6 percent.

Since the recession started in December 2007, the economy has shed 4.4 million jobs.
Companies struggling with falling revenues and tight profit margins are axing jobs in huge numbers, forcing households to further scale back spending, creating a vicious cycle.

The Obama administration has been rolling out a $787 billion stimulus package to try to break the economy's frightening downward spiral.

Third attempt in bailing out Citigroup

The government will swap the $25 billion in Citigroup’s preferred stock from its earlier bailout money into common stock. The Treasury Department said the swap is contingent on private investors making a similar swap. The deal announced Friday, Feb. 27 represents the third rescue attempt in the past five months for Citigroup, which has been struggling under the weight of losses tied to bad bets on mortgages.

This will boost the taxpayers' stake and risk in the struggling bank from 8 percent to 36 percent. The government's big stake in the common stock means taxpayers will share in future gains or losses in the company's share price. The stock conversion will make the government the largest shareholder in Citigroup

Citigroup said it has offered to swap up to $27.5 billion of its existing preferred stock held by private investors at a conversion price of $3.25 share. The Government of Singapore Investment Corp., Saudi Arabian Prince Alwaleed Bin Talal, Capital Research Global Investors and Capital World Investors are among the private investors that said they would participate in the exchange. The U.S. government will match this exchange up to a maximum of $25 billion face value of its preferred stock at the same conversion price.

The conversion of the government's Citigroup stock will give the bank more capital reserves to withstand mounting losses on its holdings of mortgages and other loans, as well as to survive further economic weakness, satisfy regulators, and eliminate the need to pay dividends. The transaction also frees Citigroup from having to buy back the preferred shares from the government. The preferred shares are similar to debt, and the banks were under pressure to essentially pay back the government in five years.

The arrangement inflames some investors' worries of bank nationalization. They think that this is another step toward creeping nationalization. Federal Reserve Chairman Ben S. Bernanke said Feb. 25 he wants to avoid nationalizing Citigroup and other large banks in a way that would wipe out shareholders and leave the U.S. in full control. Bernanke said the government might end up owning a “substantial minority” of the bank.

Investors were unhappy with the Citigroup deal, sending its shares plummeting 39 percent to a new 52-week low of $1.50 on Friday, Feb 27. The Dow Jones industrials average fell 119 points to 7,063. Sour market reaction was understandable given that the government is taking a bigger role in Citigroup and the shares of common stock are being diluted.

Worst U.S. economic contraction since 1982 in fourth quarter

Just a month ago the U.S. economic contraction measured by gross domestic product for the fourth quarter of 2008 had been estimated at 3.8 percent. Then the Commerce Department revised the GDP contraction to an astonishing 6.2 percent Friday, Feb. 27 on the ground of sharp declines in consumer spending, investment and exports.

Both the new and the old fourth-quarter figures marked the weakest quarterly showing since an annualized drop of 6.4 percent in the first quarter of 1982, when the country was suffering through an intense recession.

For all of 2008, the economy grew just 1.1 percent. That was down from a 2 percent gain in 2007 and marked the slowest growth since the last recession in 2001. GDP, the value of all goods and services produced in the United States, is the best barometer of the country's economic health.

The faster downhill slide came as the worst financial crisis since the 1930s intensified in the final quarter of 2008 following the government rescue of several large financial institutions and the collapse of Lehman Bros. The ensuing credit squeeze has driven consumer and business confidence to generational lows, and cost nearly 2 million Americans their jobs. The nation's jobless rate is now at 7.6 percent, the highest in more than 16 years.

Now in the second year of recession, most economists don't expect GDP to grow until the second half of the year, when the leading edge of the $787 billion fiscal-stimulus plan begins to have an impact.

The recession is expected to stretch at least through the first six months of 2009, as shoppers slash spending in the shadow of hard times at home and aboard. Companies, in turn, are being forced to cut jobs and production while resorting to other cost-saving measures to survive.

Federal Reserve Chairman Ben Bernanke said earlier in the week that he was confident the economy would rebound modestly later this year and into 2010, but only if the government's efforts to stabilize the banking system prove successful.