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• First-quarter GDP growth increased at a 0.6% annualized rate for the second consecutive quarter.
• The details of the report revealed significant weakness in domestic demand and foreshadowed a contraction in the third quarter.
• Dwight view: The economy is exhibiting a widespread, sharp and persistent decline in activity, consistent with the NBER's definition of a recession.

• The composition of growth for the fourth and first quarters was markedly different. In the first quarter, real final sales contracted for the first time since 1991.
• In the first quarter, the contribution from consumption, business investment spending and net exports plummeted, while residential investment spending continued to be a major drag.
• Dwight view: The makeup of first-quarter growth justifies policymakers' aggressive efforts to stimulate the economy. Action to date will hopefully prevent a severe recession, but we expect the economy to remain moribund.

• Our weaker-than-consensus forecast is based on the view that real consumption growth will remain decidedly sub-par over the next four quarters despite policymakers' efforts to stimulate demand.
• Consumption has long been the lion's share of the economy, but it has grown to a level that is unsustainable in an income and credit restrained environment.
• Dwight view: Low savings, restricted access to credit, and gale-force headwinds—surging food and energy prices, falling home prices, and a deteriorating labor market—point to impaired consumption growth over the next year.

• In past downturns, consumers have used debt to maintain their consumption levels.
• Debt service burdens are high: households are using 14.3% of their disposable income to service mortgage and consumer debt, and 5% to meet other financial obligations.
• Dwight view: Consumers are reluctant to take on additional debt. Thus, loose monetary policy is having a limited impact.

• Even if consumers wanted to increase their debt levels, access to credit is being curbed.
• In the April Fed survey, the net fractions of domestic banks reporting tighter lending standards were close to, or above, historical highs for nearly all loan categories in the survey.
• Dwight view: The limited use of credit to expand consumption will keep consumption growth restrained until mid-2009.

• Gasoline and food prices are at elevated levels. The risk is that gasoline prices continue to rise this summer towards $4.00 per gallon.
• The budget bite is large: consumers spend nearly 15% of their household budget on food and another 6% on gasoline.
• Dwight view: Higher prices for key household items are a very serious headwind for low-to-middle income consumers.

• Consumer sentiment surveys have plunged in reaction to rising food and energy prices, the weakening job market, falling home values and financial turmoil.
• In the past, sharp declines in consumer confidence have portended sharp declines in consumption growth.
• Dwight view: We expect consumption growth to contract slightly in the second quarter and remain weak for the next year.

• Demand for cyclically sensitive goods such as autos has plummeted. Weakness in autos is being compounded by surging gasoline prices.
• The April sales pace was the slowest in nearly a decade.
• Dwight view: The pace of auto sales has fallen to a level that, if sustained, will force more production cutbacks at automakers.

• Payrolls shrank by 20,000 in April, marking the fourth consecutive monthly decline. The six-month moving average dipped into negative territory.
• This contraction, combined with fewer hours worked and weak earnings growth, points to very little income growth.
• Dwight view: Weak income growth is a central tenet behind our forecast for weak consumption growth.

• In April, the unemployment rate edged down to 5% from 5.1% because of increased part-time jobs.
• Consumers' net opinion of the labor market, meanwhile, continues to deteriorate.
• Dwight view: We expect the unemployment rate to increase to 6% in 2009.

• The Case-Shiller Home Price Index more than doubled in five years as it followed the upward path in the homeownership rate.
• A recent Fed study attributed the rise in homeownership to innovations in the mortgage market that greatly expanded access to credit. Demographics also played an important although lesser role.
• Dwight view: Homeownership rates should continue to decline well into 2009, and home prices could fall another 10–15%.

• Total home sales have leveled off in recent months because of more stability in existing home sales. New home sales continue to plummet.
• Once sales stabilize, the overhang of homes for sale can be worked off and house prices will start to stabilize.
• Dwight view: We believe the overhang in unsold homes will persist until late 2009.

• Housing starts are plunging and have reached levels not seen since the 1990 recession.
• Currently, data for the new homes market show that there is nearly a year's worth of inventories on the market.
• Dwight view: Housing starts could bottom next quarter, but it will take a long time to work off the overhang, and this bodes poorly for residential construction.

• Census data show that the excess surplus of empty homes for sale is huge. To get back to trend levels, roughly 800,000 homes need to be removed.
• The potential for additional supply is worrisome. Foreclosure proceedings were initiated on roughly 1.5 million homes in 2007 and another large gain is anticipated for 2008.
• Dwight view: Private- and public-sector efforts to reduce foreclosures are aggressive, but it will be a while before we know the success rate of these plans.

• Net exports have been an important contributor to GDP growth in recent quarters.
• This is a marked change from the performance exhibited earlier this decade when net exports routinely subtracted 0.5–1.5 points.
• Dwight view: Growth abroad has started to appreciably slow, and this will restrain export growth in coming quarters.

• The real trade-weighted dollar has fallen 25% from its 2002 peak level. From last September through March, the pace of decline accelerated, but the dollar found firmer footing in April.
• This deprecation has been a boon for exporters and stability at current levels will still leave the dollar in a competitive position.
• Dwight view: We believe the bulk of the decline in the trade-weighted dollar has occurred, but the dollar's fate in coming quarters is subject to policymaker decisions in the U.S. and abroad.

• The weakening dollar and the relative growth rate differentials in the U.S. and our trading partners have led to significant improvement in the current account deficit.
• The deficit has declined from a peak of 6.8% of GDP in late 2005 to 4.9% of GDP today, but it still remains huge in a historical context.
• Dwight view: The deficit is headed to 4.5% of GDP, but a sustainable deficit is between 2–3% of GDP.

• Fiscal policymakers have responded to the economic crisis as aggressively as monetary policymakers, but additional actions will probably be needed.
• The combination of slowing revenue growth, increased transfers, planned rescue measures and potential future measures could drive the fiscal deficit to $500 billion this year from $163 billion last year.
• Dwight view: Any way you slice it, taxes are headed higher, possibly a lot higher.

• Core inflation continues to travel above the Fed's implicit comfort zone and some indicators of inflation expectations have risen.
• The Fed must guard its credibility on the inflation front—a difficult task in the current environment.
• Dwight view: We expect weak economic growth and muted labor cost increase to keep core consumer inflation in check.

• Headline inflation has remained very high, but the pass-through to core inflation has been muted.
• Rising inflation is a worldwide problem, and it is likely to weigh heavily on worldwide growth by driving up interest rates and squeezing consumers.
• Dwight view: In the near term, there is likely to be little improvement in U.S. year-over-year inflation readings, but improvement is expected before the turn of the calendar year.

• Fed officials routinely proclaim that low inflation expectations are critical for keeping inflation under control.
• Long-term inflation expectations have remained steady despite gyrations in short-term expectations related to food and gas prices.
• Dwight view: The Fed will react to any meaningful rise in long-term inflation expectations even if it means stalling economic growth.

• The Fed has slashed the federal funds rate by 325 basis points to 2.00%. In real terms, the funds rate is now close to or well below zero depending on which inflation measure you use.
• The real funds rate typically becomes negative when the economy is contracting. It is highly unusual for the real funds rate to be this low this early in a downturn.
• Dwight view: The Fed appears ready to pause with a 25 funds rate in place. We are leaving our 1.75% June forecast in place for now, but our conviction level has fallen to 60%. Because we believe the economy will remain moribund and inflation will slow, we think there is scope for resumed easing by year-end.