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GDP Shrinks 6.3% in the Fourth Quarter, First Quarter Expected to be Just as Bleak

By Jason Simpkins
Managing Editor
Money Morning

The U.S. economy contracted at a 6.3% annualized rate in the fourth quarter of 2008 – the sharpest decline in gross domestic product (GDP) in more than two decades, but still better than many analysts had expected.

The Bureau of Economic Analysis said last month that fourth-quarter GDP contracted at a 6.2% annual rate. Today’s (Thursday) revision, while negative, was smaller than the 6.7% decline forecast by economists surveyed by MarketWatch.

The most notable revision came from inventories, where the small increase in stockpiles originally reported was adjusted to show a small decline.

“The real change in private inventories subtracted 0.11 percentage point from the fourth-quarter change in real GDP, after adding 0.84 percentage point to the third-quarter change,” the BEA said in its statement. “Private businesses decreased inventories $25.8 billion in the fourth quarter, following a decrease of $29.6 billion in the third quarter and a decrease of $50.6 billion in the second.”

However, the liquidation of inventories should be a positive factor going forward, because businesses will have fewer overstocks to reduce before they can resume production.

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The price index for gross domestic purchases – which measures prices paid by U.S. residents – decreased 3.9% in the fourth quarter, increasing purchasing power for consumers and businesses.

The bright spots in the report were encouraging, but the bulk of the report was decidedly negative.

Consumer spending fell at a 4.3% pace, despite declining prices. And a weak overseas demand conspired with a resurgent dollar to drastically reduce exports.  Exports, which helped keep GDP positive in the first two quarters of the recession early last year, fell 23.6% in the fourth quarter – the biggest drop since 1971. Imports were down 17.5%.

In current dollar terms, GDP fell 5.8% to an annual rate of $14.2 trillion – the largest percentage drop in nominal GDP since 1958, according to MarketWatch.

Analysts anticipate growth figures for the first quarter of 2009 to be equally as bad, if not worse as unemployment has continued to escalate.

In a separate report today, the Labor Department said that first-time claims for jobless benefits rose by 8,000 to 652,000 last week.

About 4.4 million U.S. jobs have been lost since the recession began in December 2007, with almost half of those losses coming in the last three months alone, including the largest monthly drop in six decades in December.

“All the incoming data suggest that the economy will contract by a staggering 7% to 8% in the first quarter, before the economy begins to stabilize,” Nariman Behravesh, chief economist at IHS Global Insight Inc., told the Financial Times.

Since 1947, never has GDP fallen by more than 4% in two consecutive quarters.

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March 26th, 2009

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This entry was posted on Thursday, March 26th, 2009 at 5:28 pm and is filed under Jason Simpkins, Top News. You can follow any responses to this entry through the RSS 2.0 feed. Due to the amount of comments we receive Money Morning will not be able to respond to all questions. If you have not already registered to leave a comment, once doing so you will receive Money Morning's Daily Email.

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  1. Pingback by Stock Markets Move Past Gloom and Doom in Anticipation of the U.S. Economy's Recovery on 27 March 2009:

    [...] economy has farther to fall. Unemployment will hit double digits. Yesterday, the Labor Department announced that 5.6 million Americans are out of work, and that doesn’t count those who’ve given up looking for work. On top of that it was [...]

  2. Comment by daniel on 28 March 2009:

    fall of America economy is a possibility, the Americans should wake up and know how they can deal with this mammoth threat .in ancient times no one ever thought the Great Roman empire could collapse but it did, soviet union collapsed and now it may be the turn of the America. i suggest to the Americans to consider putting God first and asking For forgiveness through Jesus Christ because what is happening may slowly going out of what any man can handle.

  3. Pingback by Stimulus Coupled With Strong Stock Market Performance Creates Bullish Outlook on 30 March 2009:

    [...] the gross domestic product figures (GDP) 2008 were finally finalized. The U.S. Commerce Department downwardly revised the fourth quarter GDP again (-6.3%), though some economists breathed a collective sigh of relief that the release was not worse.  [...]

  4. Pingback by Narrowing of the Trade Gap Bodes Well for First Quarter Growth on 9 April 2009:

    [...] economists to reduce the projected drop in first-quarter gross domestic product (GDP). U.S. GDP contracted by 6.3% in the last three months of 2008, and most analysts expect a similar contraction to have occurred in the first three months of this [...]

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