U.S. Economy Shrinks 3.8% in 4Q, and Stats Show Worst Isn’t Over

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By Mike Caggeso
Associate Editor
Money Morning

The U.S. economy shrank 3.8% – less than forecast – but still the biggest gross domestic product (GDP) slide since 1982.

For 2008, GDP rose 1.3%, the slowest pace since 2001's 0.8% growth.

Most of the grim indicators of the third quarter – during which the economy shrank by 0.5% — deepened in the fourth. The largest contributors to the downturn were a continued fall in exports and a much larger decrease in equipment and software.

The most notable offset was a much larger decrease in imports, which increased inventories. Without such, GDP would have fallen a frightening 5.1%.

Overall consumer spending – which accounts for two-thirds of the economy – slouched 3.5%, a slight improvement from the 3.8% drop in the third quarter. Spending on durable goods such as cars and furniture fell 22.4%. Business investments fell 19.1%, the steepest drop since 1975.

"This is a severe, steep, broadly based recession" with "no quick fix," Stephen Roach, chairman of Morgan Stanley Asia Ltd., said on Bloomberg Television.

The Bureau of Economic Analysis conducted the advanced estimates, and more comprehensive data will be released Feb. 27. Final figures will be released March 26.

And those figures could turn out worst, putting immediate pressure on the Obama administration to win Congress' approval to the two-year $819 billion stimulus package. Republicans are playing hardball with Obama, demanding that he cut more taxes and government spending.

Joel Naroff, president of Naroff Economic Advisors, Inc., is optimistic, but warned first quarter GDP could be just as bad. Stats could start turning around in the spring or early summer, when confidence stabilizes and the low levels of consumer spending begin rebounding, he said.

"The nuclear winter didn't happen but let's not celebrate," Naroff wrote in a note to clients. "Whether battered investors see it that way is a different question. They may need clear indications of a turn before they start coming out from their shells."

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