* U.S. economy shrinks more severely than forecast in Q1
* Inventories plummet by record amount, exports collapse
* Consumer spending recovers after sharp declines (Recasts, updates markets)
By Lucia Mutikani
WASHINGTON, April 29 (Reuters) - The U.S. economy contracted at a surprisingly steep 6.1 percent rate in the first quarter, dragged down by a record plunge in business inventories and a slump in exports, data showed on Wednesday.
However, the data did not change views the economy would emerge from the recession, now in its 16th month, in the second half of the year. Next month, the downturn is on track to become the longest since the Great Depression.
The Commerce Department said inventories were drawn down by a record $103.7 billion -- potentially good news for the economy because it suggests businesses have cut the stockpile of unsold merchandise to levels that will let them start placing new orders, which would stimulate production.
"The larger-than-expected decline in first-quarter GDP is good news for the upcoming quarters. We expect that the recession will be over in the second half of the year," said Harm Bandholz, an economist at Unicredit Markets and Investment Banking in New York.
While the drop in gross domestic product, which followed a 6.3 percent fourth-quarter decline, was much steeper than economists had expected, investors were cheered as they saw it laying the groundwork for a recovery. Continued...
The United States Gross Domestic Product (GDP) plunged at an annualised 6.1%, after shrinking by 6.3% in the last three months of last year, according to a report released by the US Commerce Department, making the ongoing recession the worst in at least fifty years.

The report was released just hours before Federal Reserve officials were scheduled to convene to decide how much money to insert into the economy.

The GDP has now fallen for three quarters in a row for the first time in almost forty years. The decline is worse than the average 4.7% drop forecast by economists.

“We are likely to emerge from this recession very slowly and the recovery will be very weak. The aggressive policy response we have gotten will take time to work, but it will counter the still-strong headwinds holding the economy back,” said the chief economist at Morgan Stanley in New York, Richard Berner.

Stock market shares went up on Wednesday, following an analyst's report suggesting that non-performing assets will reach their height in 2009. As of noon, the Standard & Poor's 500 index had gained 2.2%, reaching a level of 873,59 points.