Shouting out the future

GDP Sinks As Consumers And Businesses Cut Back

The economy shrank at a 3.8 percent pace at the end of 2008, the worst showing in a quarter-century, as the deepening recession forced consumers and businesses to throttle back spending.

Although the initial result was better than economists expected, the figure is likely to be revised even lower in the months ahead and some believe the economy is contracting in the current quarter at a pace of around 5 percent.

The current January-March period, they said, will probably turn out to be the worst quarter for the recession.

American consumers and businesses cut back everywhere in the final three months of 2008. Shoppers chopped spending on cars, furniture, appliances, clothes and other items. Businesses dropped the ax on equipment and software, home building and commercial construction.

And overseas sales of U.S.-made goods and services tanked as foreign buyers grappled with their own economic woes.

"The downturn is intensifying. The fourth quarter is worse than it looks," said Mark Zandi, chief economist at Moody's Economy.com.

The new figure, released Friday 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 prior quarter.

The report tallies 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.

A build-up in business inventories—which in calculating GDP adds to economic activity— masked the fourth-quarter's true weakness. When inventories are stripped out, the economy would have contracted at a 5.1 percent pace in the fourth quarter, closer to the 5.4 percent drop that economists expected.

Businesses couldn't cut production fast enough in response to waning customer demand and got stuck with excess inventories, economists explained.

On Wall Street, stocks dipped. The Dow Jones industrial average slid more than 60 points in morning trading, and broader indexes also fell.

Still, the fourth quarter was by far the weakest three-month period in 2008, and the 3.8 percent figure is likely to be revised even lower as the government makes new estimates based on more complete data.

The economy will stay very weak for much of this year, analysts predict.

A massive pullback by consumers played a prominent role in the economy's worsening backslide. They are cutting back on spending as jobs disappear and major investments—homes, stocks, retirement accounts—tank in value.

Businesses are retrenching, too, as profits shrivel and demand wanes from customers in the U.S. and overseas.

Battered consumers slashed spending at a 3.5 percent pace at the end of 2008, following a bigger 3.8 percent annualized cutback in the third quarter. The last time consumers chopped spending for two straight quarters was in the closing quarter of 1990 and the opening quarter of 1991.

Investing in Infrastructure—Now or Later?

In the fourth quarter of 2008, Americans cut back spending especially hard on big-ticket "durable" goods, including cars, appliances and furniture. Spending on durables plunged at rate of 22.4 percent, the most since early 1987. A 7.1 percent annualized cutback in spending on "nondurables," such as food and clothing was the deepest since the end of 1950.

Americans newfound frugality was clearly visible. The 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 get back to full economic health after 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, 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 annualized 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 the third quarter of 1974.

Economic slowdowns in other countries has cut into demand for U.S goods and services.

The report provided clear evidence of the economy's rapid deterioration as the housing, credit and financial crises—the worst since the 1930s—feed on each other.

It's a vicious cycle that has proven difficult for Washington policymakers to break.

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

For all of 2008, the economy grew by 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.

To jolt life back into the economy, President Barack Obama and Congress are racing to enact a multibillion-dollar 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.

Economists say the money needs to be quickly pumped into the economy to help stop the free-fall.

The White House was bracing for bad news.

On the eve of the report's release, press secretary Robert Gibbs thought the fourth-quarter results would be "fairly staggering."

The economy plunged deeper into recession despite a $700 billion financial bailout program run by the Treasury Department and a slew of radical programs by the Federal Reserve and others designed to bust through a debilitating credit clog and get banks to lend more freely.

The Fed last month slashed a key interest rate to a record low, and on Wednesday signaled that it would use other unconventional tools to turn the economy around.

The central bank acknowledged that its hope for a gradual economic recovery later this year faced "significant" downside risks.

Trying to survive the downturn, businesses are scrambling to cut costs and that's taking a painful toll on the nation's labor market.

The unemployment rate jumped to a 16-year high of 7.2 percent in December and could hit 10 percent or higher at the end of this year or early next year. A staggering 2.6million jobs were lost last year, the most since 1945, though the labor force has grown significantly since then.

Another 2 million or more jobs will vanish this year, economists predict.


Mikey says:

I am posting this news as a historical notation. Something to look back on in the future as things improve. The tone of the news suggests that things going to stay bad for a long time. If you go back to this same time period in 2006 you would see just the opposite. The housing market was going to keep going in spite of higher interest rates because THE JOB MARKET WAS SO STRONG. Where are we now well the economy is going to stay weak evem though we have lower interest rates BECAUSE THE JOB MARKET IS SO WEAK.

The constant in everything is change but the focus is always on the past. Whta is the past now? It is the bad economy what is in the future? The improving economy. That is the change. It is easier to know something is happening than to know what is going to happen but all it takes is just a little experience and some imagination and the future will come into focus. The thing that clouds that promising future is the shouting of the those who see the obvious. The masses are always attracted to the shouting and therefore are easily deceived.

My investment philosophy is to look to the change in the future not the noise of today. It requires me to be wrong in the present to be right in the future. At his time there are 4 trillion dollars in the money market funds because investors want to be safe. They did not want to be safe in 2006 or 2007 or even until Sept of 2008, but now they do and they have put their money in investments that are safe havens. It is too late to be safe now. It is time to take a risk now that the problems are known. These same investors will be back to buy when every thing is safe again but they will pay much higher prices for that safey. At some point prices will move higher and rates will stay low enough so that investors will get sick of earning less than 1% and venture out into world of greed again. It never changes.
The beat goes on ...Mikey