U.S. Economy Contracts 6.3%


The U.S. economy shrank in the fourth quarter more than previously estimated, leading to the biggest plunge in corporate earnings in a half century and underscoring why companies are slashing payrolls this year

Gross domestic product contracted at a 6.3 percent annual rate from October to December, the weakest since 1982, the Commerce Department said today in Washington. Profits dropped 16.5 percent from the prior quarter, the most since 1953.

The economy has lost more than 1.2 million jobs this year as companies trim costs and rebuild profits. Recent reports showing a rebound in sales indicate last quarter's slump may give way to smaller declines in growth. A let-up in the recession would set the stage for Obama's stimulus plan and Federal Reserve measures to take hold in the second half.

The drop in GDP, the sum of all goods and services produced, was larger than the 6.2 percent decline estimated by the Commerce Department last month. The median forecast of 69 economists in the Bloomberg survey called for a 6.6 percent decrease, and estimates ranged from declines of 7.1 percent to 6 percent.

This is the final of three estimates the government issues on economic growth. The world's largest economy shrank at a 0.5 percent annual rate from July through September.

For all of 2008, the economy grew 1.1 percent, the same as previously estimated, as exports and government tax rebates in the first six months helped offset the slump in consumer spending that followed.

Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, fell by $250.3 billion from the third quarter, the biggest decrease since records began in 1947.

For all of last year, profits were down 10.1 percent, the biggest annual drop since 1970.

Consumer spending, which accounts for about 70 percent of the economy, fell at a 4.3 percent pace last quarter, marking the first back-to-back decreases in excess of 3 percent since record- keeping began in 1947.

Retailers are doing better so far this year. Sales fell less than forecast in February and January's 1.8 percent gain was the biggest in three years, Commerce reported earlier this month.

Other drags on growth are also moderating. Builders broke ground on 22 percent more homes in February than in the previous month and sales of new and previously owned houses also increased, erasing some of the gloom surrounding the market.

A bigger reduction in inventories than previously estimated accounted for most of the GDP revision. Companies cut stockpiles at a $25.8 billion annual rate, compared with a previous estimate of $19.9 billion.

Fewer goods on hand lay the foundation for growth in 2009 as manufacturers gear up to meet any improvement in demand.

Inventories of long-lasting factory goods fell 0.9 percent in February after dropping 1.1 percent in January, the biggest two-month slide since 2003, Commerce figures showed yesterday. The decrease brought the ratio of inventories to sales down for the first time in seven months.


TradingEconomics.com, Bloomberg
3/26/2009 5:48:18 AM