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Gross domestic product (GDP), the output of goods and services produced by labor and property located in the United States, decreased at the annual rate of 6.1 percent in the first quarter of 2009, according to advance estimates released by the Bureau of Economic Analysis. This decrease is only slightly smaller than the 6.3 percent drop in GDP in the fourth quarter of 2008 and represents the third consecutive quarter of GDP decline.
The chart below shows the contribution of different components of GDP to the overall GDP growth since the beginning of 2008. 
Personal consumption and net exports both contributed positively to GDP growth in the first quarter of this year. This is in contrast to the fourth quarter of 2008, when they both contributed negatively. Government expenditures contributed negatively to the GDP, despite the recently adopted fiscal stimulus package. The largest negative contribution to GDP growth in the first quarter of 2009 came from gross private domestic investment, which consist of investment in nonresidential structures, in equipment and software, residential investment ("Housing" on our chart), and the change in business inventories. Striped bars on the chart show the impact of these categories of investment on the GDP growth. A fall in total private domestic investment subtracted 8.83 percentage points from GDP growth. Among the different categories of investment, the largest negative impact came from the reduction in business inventories, which alone accounted for 2.79 percentage points of the fall in GDP. In an earlier research commentary we reported that in the current recession, businesses seem to be reducing inventories faster than they have done in past recessions. The data on the components of GDP support this observation. While the large decrease in investment might be worrying, it is encouraging that a substantial part of the decrease came from the reduction in inventories. A decline in inventories hasn't had as adverse an impact on GDP since the first quarter of 1975. At that time, a fall in investment subtracted 11.74 percentage points from GDP growth, of which 8.11 percentage points were attributed to the fall in inventories. The first quarter of 1975 was also the quarter when the recession of 1973-75 reached a trough, after which the economy began to recover. When most of the fall in investment comes from a reduction in inventories, it indicates that businesses are making the necessary adjustments to the difficult economic conditions. By reducing the inventory overhang, businesses are setting the stage for the recovery. With a lower level of inventories, firms will have to step up production and employment at a faster pace once the recovery starts. Listen to Research Fellow Polina Vlasenko discuss this topic and many more on WAMC Northeast Public Radio.
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