US GDP contracts sharply in Q1 but worst may be over

The US economy contracted at a 6.1 percent annual pace in the first quarter, worse than economists expected.

However, Calculated Risk thinks that the news is actually not bad because "the decline in Q1 was weighted towards lagging sectors". The slump in residential investment, a leading sector, is already slowing and this suggests that the "worst of the GDP declines is probably over".

Calculated Risk considers consumption a leading indicator and in this regard, James Hamilton noted that consumption rebounded in the first quarter, which could be key to a recovery.

On Tuesday, the Conference Board had reported that its consumer confidence index climbed to 39.2 in April from 26.9 in March.

A survey of economists by the WSJ's Real Time Economics blog found some "glimmers of hope" in GDP, again driven mainly by signs of greater consumer spending.

The Federal Reserve is no exception. In its statement released at the end of its meeting on Wednesday, the FOMC noted the improvements in the economy. From Bloomberg:

The Federal Reserve refrained from increasing purchases of Treasuries and mortgage securities, signaling the worst of the recession may be over.

“The economy has continued to contract, though the pace of contraction appears to be somewhat slower,” the Fed’s Open Market Committee said in a statement after a two-day meeting in Washington. “Household spending has shown signs of stabilizing, but remains constrained by ongoing job losses, lower housing wealth and tight credit.”

The FOMC left the target fed funds rate unchanged at between zero and 0.25 percent.

Meanwhile, Europe's economy has also begun to show signs of improvement. From Bloomberg:

European confidence in the economic outlook increased for the first time in 11 months in April as inflation slowed and governments boosted spending to combat the recession.

An index of executive and consumer sentiment in the 16 nations that use the euro rose to 67.2, the first increase since May 2008, the European Commission in Brussels said today. The April reading was above the 65.6 median estimate of 26 economists in a Bloomberg survey, and up from 64.7 in March. Euro-area capacity utilization for the quarter fell to 70.5 percent, the lowest since 1990, the commission said.