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Economy Shrinks In 4Q At 3.8 Percent Pace

JEANNINE AVERSA   01/30/09 04:56 PM ET   AP

Britain Recession

WASHINGTON — Battered by layoffs, debts and dread of worse to come, shoppers clutched ever tighter to their wallets in the final three months of 2008 and thrust the economy into its worst downhill slide in a quarter-century. Americans cut spending on everything from cars to computers, and it's only getting worse so far in the new year.

All told, the economy staggered backward at a 3.8 percent pace at the end of last year, the government said Friday. And the tailspin could well accelerate in the current quarter to a rate of 5 percent or more as the recession churns into a second year and consumers and businesses buckle under a relentless crush of negative forces.

Spending cutbacks hit everywhere last quarter. Shoppers chopped spending on cars, furniture, appliances, clothes, food, transportation and more. Businesses dropped the ax on equipment and computer software, home building and commercial construction. And overseas sales of U.S.-produced goods and services tanked as foreign buyers grappled with their own economic woes.

It's "a continuing disaster" for the nation's families, declared President Barack Obama, making what has become an increasingly urgent daily pitch for his $819 billion stimulus package to revive the economy.

No one thought he was overstating. "It's an economic hurricane," said Richard Yamarone, economist at Argus Research.

On Wall Street, stocks tumbled for a second straight day. The Dow Jones industrial average slid 148 points.

With fallout from the housing, credit and financial crises _ the worst since the 1930s _ ricocheting through the economy, analysts predict up to 3 million jobs will vanish this year _ even if Congress quickly approves the stimulus measure.

Just this week, tens of thousands of new layoffs were announced by companies including Ford Motor Co., Eastman Kodak Co., Black & Decker Corp., Boeing Co., Pfizer Inc., Caterpillar Inc., Home Depot Inc. and Target Corp.

"Everybody is trying to figure out how to survive," said Brian Bethune, economist at IHS Global Insight.

The fourth quarter was by far the weakest in 2008. And the 3.8 percent figure is likely to be revised even lower as the government gathers more complete data. The economy is expected to remain feeble this year and into next year even if the recession ends in the fall, a best-case scenario.

Friday's report tallied gross domestic product, the value of all goods and services produced within the United States. It is considered the broadest barometer of the country's economic health.

The initial fourth-quarter result, released by the Commerce Department, showed the economy sinking at a much faster clip in the October-December period than the 0.5 percent decline logged in the prior quarter. It marked the first back-to-back quarterly contractions since 1991.

A buildup in business inventories, adding to economic activity in calculating GDP, masked even deeper weakness. If inventories were stripped out, the economy would have contracted at a 5.1 percent pace in the fourth quarter. Businesses couldn't cut production fast enough as customers stopped buying and got stuck with excess inventories, economists explained.

Consumers are cutting back on spending as jobs disappear and major investments _ homes, stocks, retirement accounts _ drop in value. Businesses are retrenching, too, as profits shrivel and demand wanes from customers in the U.S. and overseas.

The list of discouraging figures is a long one:

_ Beaten-down consumers slashed spending at a 3.5 percent pace following a 3.8 percent cutback in the third quarter, the first back-to-back declines of more than 3 percent since records began in 1947.

_ Spending for big-ticket "durable" goods, including cars, appliances and furniture, plunged at a rate of 22.4 percent, the most since early 1987.

_ The annualized cutback in spending on "nondurables," such as food and clothing, was 7.1 percent last quarter. The last time it was deeper was at the end of 1950.

Caution was clear everywhere.

Americans' savings rate rose to 2.9 percent in the fourth quarter. That was up from 1.2 percent in the third quarter and matched the rate in early 2002, when the country was still struggling to recover from the 2001 recession.

Big cutbacks by homebuilders, reeling from the collapsed housing market, and other companies also figured into the fourth-quarter weakness. Homebuilders slashed spending at a 23.6 percent pace. That was even deeper than the 16 percent annualized cut in the prior three months.

Spending by businesses on equipment and software dropped at a whopping 27.8 percent pace in the fourth quarter, the most since early 1958.

Meanwhile, U.S. exports, whose growth earlier last year helped to keep the economy afloat, turned negative.

Exports plunged at a rate of 19.7 percent in the fourth quarter, the most since 1974. Economic slowdowns in other countries have bitten into demand for U.S goods and services.

For the economy as a whole, the 3.8 percent annualized drop was weakest quarterly showing since a 6.4 percent plunge in the first quarter of 1982, when the country was suffering through a severe recession.

Last year, the economy grew just 1.3 percent. That was down from a 2 percent gain in 2007 and marked the slowest growth since the last recession in 2001. This year, analysts predict the economy will shrink anywhere from 2 to 2.5 percent, the worst performance since 1946.

To stop the free-fall, Obama and Congress are racing to enact a recovery package of increased government spending that includes big public works projects and tax cuts. The House passed a $819 billion package on Wednesday, and the bill is working its way through the Senate.

Trying to ride out the storm, businesses are scrambling to cut costs, and that's taking a painful toll on the nation's workers. The unemployment rate jumped to a 16-year high of 7.2 percent in December and could hit 10 percent or higher by the end of this year or early next year.

The recession also has caused once-surging prices to retreat.

An inflation gauge tied to the report showed prices dropping at a rate of 5.5 percent in the fourth quarter _ a turnaround from the 5 percent growth in the prior period. Stripping out food and energy, prices inched up at a rate of 0.6 percent. That compared with the 2.4 percent growth rate in the third quarter.

The most severe spending pullback in decades is sending retailers, including Circuit City and discount clothing chain Goody's Family Clothing, into liquidation. Stores were battered by the weakest holiday period in four decades by one measure.

Retail sales appear to be deteriorating further this month. The National Retail Federation predicts that sales will fall 0.5 percent this year, well below last year's meager 1.4 percent gain.

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Filed by Katharine Zaleski  |