INSTANT VIEW: GDP shrinks 3.8 percent in Q4

NEW YORK (Reuters) - The U.S. economy shrank at its fastest pace in nearly 27 years in the fourth quarter, government data showed, sinking deeper into recession as consumers and business cut spending.

KEY POINTS: * The Commerce Department on Friday said gross domestic product, which measures total goods and services output within U.S. borders, plummeted at a 3.8 percent annual rate, the lowest pace since the first quarter of 1982, when output contracted 6.4 percent. * GDP fell 0.5 percent in the third quarter. * These were the first consecutive declines in GDP since the fourth quarter of 1990 and the first three months of 1991. * Analysts polled by Reuters had forecast GDP would contract 5.4 percent in the fourth quarter. * The advance report from the Commerce Department showed consumer spending, which accounts for two-thirds of U.S. economic activity, fell 3.5 percent in the fourth quarter after declining 3.8 percent in the third quarter, also the first consecutive drops since the last quarter of 1990 and the first quarter of 1991. * Spending on durable goods like cars and furniture plunged 22.4 percent, the steepest decline since the first quarter of 1987. * The personal consumption expenditures price index plunged a record 5.5 percent after rising 5 percent in the third quarter. * Excluding volatile food and energy items, core prices grew at a muted 0.6 percent, the slowest rate since the fourth quarter of 1962. Core PCE rose 2.4 percent in the third quarter. * Analysts polled by Reuters were expecting the PCE index to fall 5.4 percent.

COMMENTS:

WILLIAM CHENEY, CHIEF ECONOMIST, JOHN HANCOCK FINANCIAL,

BOSTON:

"On the face of it, it's not as awful as expected. Final sales is still minus 0.5 percent. Inventory is one-third guess work because the December inventory number hasn't come in yet. That amount of inventory accumulation is not voluntary because businesses couldn't sell as much as they want.

"If these numbers hold up, that means the first quarter will be worse. This is postponing the day of reckoning. It just feels things are getting worse and worse. Producers are laying people off like crazy. This will have a global impact because there will be less demand for imports. It could have a pronounced effect on Asian export-driven countries and to a lesser extent Europe too.

"There is no good news in this report. I don't see much in a way of silver lining. I'm pretty sure the first quarter will be worse than fourth quarter. It could be minus 5.0 or minus 6.0 percent. This reinforces the notion that we need a massive burst of government stimulus...This seems to be the only near term hope."

CARY LEAHEY, ECONOMIST, DECISION ECONOMICS, NEW YORK:

"Fourth-quarter GDP declined less than people expected, but the bulk of the forecast error was in inventories. So GDP in the fourth quarter was better than expected, but for the wrong reasons because these excess inventories will have to be worked off in the first quarter of 2009.

"So a better than expected GDP report in the fourth quarter of 2008 could give us a worse than forecast GDP report in the first quarter of 2009. It could also make any rebound in the middle of the year even softer. The U.S. is now fighting an adverse inventory cycle in addition to adverse housing, consumer, capital spending and employment cycles. The excess inventories give the economy yet another headwind to deal with."

NIGEL GAULT, CHIEF U.S. ECONOMIST, GLOBAL INSIGHT, LEXINGTON,

MASSACHUSETTS:

"The big swing factor here is that we actually added inventories, stocks of unsold goods rose. In previous quarters we had been running down inventories, this quarter we actually added to them. Unsold inventories of goods piled up, and that contributed 1.3 percentage points to growth, which is why we only dropped 3.8 percent on the GDP number.

"Another big contributor, there's a big increase in federal government spending, both defense and particularly non-defense... That also helps us.

"If you go down the spending categories... like consumer spending down 3.5 percent, that's probably what people were looking for. But look at business equipment and software spending, down 27.8 percent, exports down 19.7 percent!

"This is one where the headline is clearly better than people were expecting. But underneath, those details do not look healthy and it's telling us firms were not cutting production as fast their sales were falling. And that's a bad sign for what's going to happen in the first quarter because it says they got to work off these excess inventories."

WIN THIN, CURRENCY STRATEGIST, BROWN BROTHERS HARRIMAN, NEW

YORK:

"Obviously this is not a strong report, but certainly the figures didn't come in as bad as expected. Lately, the dollar has benefited from bad news on the back of risk aversion and given this report is not so bad, we saw the currency come off a bit against the euro and other high-yielders right after the release.

"But currency moves could be a bit strange from here and looking closely at the report, it does not bode well for the first quarter."

DAVID WYSS, CHIEF ECONOMIST, STANDARD & POOR'S, NEW YORK:

"It's actually better than we were expecting, quite a bit better than we were looking for, actually. It's good news for the market, but not the only factor that will help things, certainly ExxonMobil's results were good.

"In the data, it looks like a lot of the surprise came from trade numbers. We've seen a big drop in the trade deficit, but we thought that was oil prices, so we assumed that wouldn't affect the real data. We see now it does. Consumer numbers came in as expected, and capital expending was a tad better than we were looking for.

"This should be a mild help for the market, but this is for 2008. Nobody cares about 2008, we're talking about 2009 now."

DANA SAPORTA, ANALYST DRESDNER KLEINWORT, NEW YORK:

"I think the numbers are weaker than the better-than-expected headline reading suggests because the miss was mainly in what could have been an involuntary increase in inventories.

"Because inventories rose in the fourth quarter we're expecting a bigger drop than otherwise in the first quarter of 2009 -- a bigger drop in inventories and probably a bigger drop in GDP than otherwise."

GEORGE DAVIS, CHIEF TECHNICAL ANALYST, RBC CAPITAL MARKETS,

TORONTO:

"Relative to consensus, the number is not as strong as it appears. A lot of it has to do with inventory shifts. We might see a short term sell off in the U.S. dollar as risk aversion decreases but that will not last."

MARKET REACTION: STOCKS: U.S. equity index futures reverse losses to trade higher after smaller-than-expected contraction in GDP. BONDS: U.S. Treasury debt prices pare gains. DOLLAR: U.S. dollar pares gains versus the euro.