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Friday, January 30, 2009

Steep Slide in U.S. Economy, but Not as Dire as Forecast

The United States economy shrank at its fastest pace in a quarter century from October through December, the government reported on Friday, in the broadest accounting yet of the toll of the credit crisis. Consumer spending and business investment all but disappeared, and economists said the painful contraction was likely to continue at an alarming pace well into the summer.

The gross domestic product — a crucial measure of economic performance — shrank at an annual rate of 3.8 percent in the fourth quarter of 2008. Although the contraction was significantly better than the 5.5 percent decline that economists had expected, it raised the possibility that the economy had not yet hit bottom.

Rising inventories helped propped up the overall number because the government counts them as growth. The final sales figure for the fourth quarter, which excludes inventories, fell 5.1 percent in the last three months of 2008.

Employers their investments in computers, office equipment, machinery and other capital goods by an annualized 19.1 percent in the fourth quarter to reduce costs.

Trade fell, as Americans bought fewer Asian-made televisions and computers, and global demand for American goods and services ebbed. Exports in the fourth quarter declined 19.7 percent while imports dropped 15.7 percent.

And American consumers, who took on home equity loans and large amounts of credit card debt to finance their lifestyles earlier in the decade, curtailed their spending for a second consecutive quarter. Consumer spending, which typically accounts for two-thirds of the economic growth fell 3.5 percent in the quarter, after decreasing 3.8 percent in the third quarter.

With no end in sight to the downturn, the stark numbers on Friday are likely to intensify the debate over an enormous stimulus plan moving through Congress.

“The fact that you’re not seeing any evidence that things are turning for the better has added quite a bit to the urgency to get things done and do something substantial,” said Michael E. Feroli, a United States economist at JPMorgan Chase.

The House, divided along partisan lines, passed an $819 billion package of tax cuts and spending on Wednesday, and the Senate is to begin debating its version of the package on Monday. President Obama and most Democrats support the plan, but not a single Republican has voted for it.

While many economists say the stimulus is crucial to replace a paucity of private spending and investment, they are concerned that the tax cuts in the Democratic plan will not be particularly useful, and that more effective spending proposals will take too long to put in place.

“It’s badly needed, and as quickly as possible,” said Nigel Gault, chief United States economist at IHS Global Insight. “You’d like to be able to inject a huge amount of stimulus very quickly, but how practically can that be done? Practically speaking, you can’t spend the money that fast.”

The pace of contraction in the fourth quarter was the steepest since 1982, when the economy shrank at an annual rate of 6.4 percent in the first three months of the year after the Carter administration limited bank borrowing as a means of strangling inflation.

But it may be more difficult to pull the country out of this recession than the downturn of the 1980s, when the Federal Reserve helped stimulated growth by slashing interest rates. In December, the Fed cut its target overnight rates to a record low near zero percent, exhausting one of its key weapons.

“They’re running out of options,” said Ann L. Owen, associate professor at Hamilton College and a former Fed economist. “They’ve got the Fed funds rate down to basically zero. They’re talking about buying Treasuries. It’s not really clear what kind of effect they can have on the economy.”

Although the recession officially began 13 months ago, as the housing market soured and energy prices pinched consumers, the gross domestic product continued to grow slowly in 2008 until the third quarter, when it contracted at an annual rate of 0.5 percent.

The turmoil in the last three months of the year reflected widespread havoc in the economy. Housing prices fell at their fastest pace on record, credit markets dried up and billions of dollars’ worth of bad mortgage debt threatened the stability of the country’s largest financial institutions.

Because of their losses, many banks pulled back on lending, and even healthy ones tightened lending standards for those who still had a stomach to borrow.

Businesses reeled from falling sales and dim prospects for growth. Employers like Microsoft, Starbucks, Sprint and Home Depot have cut thousands of jobs as they prepare for a difficult year. Unemployment now stands at 7.2 percent, and some economists said that jobless rates could hit 9 percent as the recession spreads like an oil slick.

“It’s a severe contraction,” said Mickey Levy, chief economist at Bank of America. “No sector of the economy is safe right now.”


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