January 30, 2009 / 2:12 PM / 9 years ago

GDP sees biggest drop in 27 years

<p>Signs advertising sales are seen outside a hardware store in Islip, New York January 29, 2009. REUTERS/Shannon Stapleton</p>

WASHINGTON (Reuters) - The U.S. economy shrank at its fastest pace in nearly 27 years in the fourth quarter, government data showed on Friday, sinking deeper into a recession that the White House said demands urgent action.

In a report that showed a broad-based contraction across nearly all sectors, the Commerce Department said gross domestic product shrank at a 3.8 percent annual rate, the biggest contraction since the first three months of 1982.

President Barack Obama, who is pushing Congress to approve a package of spending and tax cut measures that could cost close to $900 billion, said the report highlighted the need for quick government action.

“It’s a continuing disaster for America’s working families,” Obama said of the latest data. “The recession is deepening and the urgency of our economic crisis growing.”

The decline, however, was not as deep as analysts had expected, thanks to a $6.2 billion rise in inventories, a development that suggests businesses might pull back even more sharply in the first quarter, prolonging the year-old recession.

“Because fourth-quarter GDP was supported by a dubious increase in inventories, today’s positive data surprise is a significant burden for the upcoming quarters,” said Harm Bandholz, an economist at UniCredit Markets and Investment Banking in New York.

The sharp drop followed a 0.5 percent decline in the third quarter. These are the first back-to-back quarterly contractions in output since the last quarter of 1990 and the first quarter of 1991.

The data knocked stocks, with the Dow Jones industrial average ending down 1.82 percent at just over the 8,000-point threshold. Government bond prices, which tend to get a lift from any signs of deepening distress in the economy, rose on safe-haven bids.

Data out of the euro zone was also dismal, giving the dollar an edge against the euro.

INVENTORIES CUSHION DECLINE

Analysts had expected the economy to shrink at a 5.4 percent annual pace in the fourth quarter. The shift in inventories added 1.3 percentage points to the change in GDP, meaning the economy would otherwise have contracted by at least 5 percent.

“However, with manufacturers slashing production, look for a sizable hit to GDP in coming quarters. It now looks like first-quarter GDP will contract more than 5 percent,” said Sal Guatieri, an economist at BMO Capital Markets in Toronto.

Consumer spending, which accounts for two-thirds of U.S. economic activity, fell at a 3.5 percent rate in the fourth quarter after dropping at a 3.8 percent pace in the previous three months.

<p>The economy shrank at its fastest pace in nearly 27 years in the fourth quarter, government data showed on Friday, sinking deeper into recession as consumers and business cut spending. REUTERS/Graphics</p>

It was the first time consumer spending had contracted for two straight quarters since the period that ended in March 1991.

Falling house prices, coupled with the U.S. stock market’s collapse, tight access to credit and rising unemployment have slashed household wealth, causing a slump in demand.

Spending on durable goods like cars and furniture plunged 22.4 percent, the steepest decline since early 1987.

Business investment slumped 19.1 percent, the sharpest pullback since the first quarter of 1975.

Home building also took another heavy hit, plummeting at a 23.6 percent rate, while exports plunged nearly 20 percent, their biggest drop since the third quarter of 1974.

For the year as a whole, GDP grew 1.3 percent, the smallest gain since 2001, the last time the U.S. economy was in recession.

PRICES POST RECORD DROP

Other reports also painted a grim economic picture.

Business activity in New York City fell for a 12th straight month in January, while a gauge of business activity in the Chicago region hit a new low for the current downturn.

But consumer confidence rose to a four-month high in January amid optimism the Obama administration’s policies would help to fix the broken economy.

The economy’s collapse has pulled the floor out from commodity costs and raised the risk that a broad array of prices could begin to drop, further sapping activity and creating more headaches for the Federal Reserve.

A measure of consumer prices in the GDP report plunged at a record 5.5 percent annual rate in the fourth quarter, after a 5 percent rise in the third quarter. Excluding volatile food and energy items, core prices grew a muted 0.6 percent, the slowest rate since the fourth quarter of 1962.

“It is a testament to the speed of decline in commodity prices and the pressure on producers to cut prices in order to retain business. It will reinforce the worries about deflation at the Fed,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

The weak job market has pinched wages and benefits. A report from the Labor Department showed that employment costs rose just 2.6 percent last year, the smallest gain since the government began keeping records in 1982.

Additional reporting by Alister Bull in Washington, Ros Krasny in Chicago and Burton Frierson and John Parry in New York; editing by Gary Crosse

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