GDP Contracts 6.2% with Analysts Divided Over a Recovery

By Jason Simpkins
Managing Editor
Money Morning

U.S. gross domestic product (GDP) contracted at a 6.2% annual pace in the fourth quarter of 2008, the most since 1982, the Commerce Department said Friday.

The government last month estimated the drop in fourth-quarter GDP at 3.8%.  Friday’s 2.4 percentage-point revision was almost five times as large as the average adjustment.

Most of the major components contributed to the much larger decrease in real GDP in the fourth quarter than in the third,” the Commerce Department said. “The largest contributors were a downturn in exports and a much larger decrease in equipment and software.”

Global trade, which contributed a 0.1% gain in the advance report, actually subtracted half a percentage point from growth last quarter, indicative of the global nature of the current financial crisis.

Exports of goods and services decreased 23.6% in the fourth quarter, compared with a 3% increase in the third. Imports of goods and services decreased 16%.

Spending on equipment and software dropped 29% – the most since 1958 – and business investment plunged 21%.

"We'd held out a slim ray of hope that it might surprise to the upside based on the better trade balance,” Boris Schlossberg, Director of Currency Research at GFT Forex, told Reuters. “But it's just doom all over. There's nothing good to take away from this report. The only thing is there's no good news on the other side of the Atlantic, either.”

Consumer spending, which accounts for 70% of the economy, fell at a 4.3% annual pace, the steepest decline in nearly three decades.

U.S. Federal Reserve Chairman Ben S. Bernanke last week issued a dismal outlook for this year, conceding that the economy is undergoing a “severe contraction.” Still, he remained optimistic that the situation will turn around.

"If actions taken by the administration, the Congress and the Federal Reserve are successful in restoring some measure of financial stability," Bernanke said, "there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery."

Others are less optimistic, however.

Speaking at a dinner at Columbia University, George Soros compared the current situation to the breakup of the Soviet Union, and said that the whipsaw effects of the crisis are actually more severe than the Great Depression.

"We witnessed the collapse of the financial system," Soros told his audience. “It was placed on life support, and it’s still on life support. There’s no sign that we are anywhere near a bottom."

Former U.S. Federal Reserve Chairman, and advisor to President Barack Obama, Paul Volcker agreed.

"I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world," Volcker said.

And Nouriel Roubini, a professor at New York University's Stern School of Business and chairman of RGE Monitor, used a baseball analogy to make the point that the United States is nowhere near the end of the current crisis.

"We are still in the third and fourth innings," Roubini told Reuters in an interview,

Stocks were mostly flat Friday, as investors grappled with the decision of who to believe. The Dow Jones Industrial Average fell 11.7 points to 7,170.37 and the Standard & Poor’s 500 Index was down 4.2 points at 748.47.

“I maintain that the trading range will be 750 to 900 (in the S&P500 stocks index),” Subodh Kumar, Chief Investment Strategist at Subodh Kumar & Associates in Toronto told Reuters. “We're at the lower end, but you could see some pullback. I think we're bouncing along the bottom.”

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