Funds Rate Remains Unchanged
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May 5, 2009—Gross Domestic Product decreased at a 6.1% annual rate. The Institute of Supply Management's manufacturing survey improved in April but remains weak. The Federal Reserve left the federal funds rate unchanged.
Gross Domestic Product
The Bureau of Economic Analysis released its first report of first quarter 2009 Gross Domestic Product (GDP). GDP declined at a 6.1% annual rate, up slightly from -6.3% in the fourth quarter. The largest contributors to the decline were falling inventories, massive drops in nonresidential construction, and a decline in federal, state, and local government spending. Surprisingly, consumption increased 2.2%, and net exports improved, driven by a large decline in imports. Compared to the first quarter of 2008, real GDP declined 2.6%. This is the largest decline in real GDP year over year since 1982. With the economy being battered on so many fronts, positive growth may not return until the final quarters of 2009.
Federal Open Market Committee Monetary Policy
The FOMC kept the federal funds rate at a range between 0% and 0.25% at its latest meeting and expected to keep it there for some time. The Fed cited the soft labor market, lost housing and equity wealth that is weighing on consumer spending, poor confidence, tight credit, weak investment, and the ongoing global recession in its decision to keep rates at their current levels. Looking ahead, the Fed intends to keep rates in its current range for the foreseeable future. The Fed struck a modestly upbeat tone and expects a gradual recovery in the economy. The Fed continues to expect inflation to remain subdued.
The Institute for Supply Management's (ISM) manufacturing survey rose 3.8 percentage points to 40.1% in April from 36.3% in March. After remaining below 40% for six months, the ISM finally appears to be improving, although it is still well below expansionary levels. The current level is still consistent with an economy in a severe recession. Looking ahead, manufacturing should remain sluggish as consumers, governments, and businesses pull back on spending in reaction to the ongoing economic turmoil. However, the index has improved over the previous months, thus offering a glimmer of hope that manufacturing may have bottomed out.