US economy shrinks 6.2 percent

WASHINGTON - The US economy contracted at a staggering 6.2 per cent pace at the end of 2008, the worst showing in a quarter-century, as consumers and businesses ratcheted back spending, plunging the country deeper into recession.

By Jeannine Aversa (AP)

Published: Sat 28 Feb 2009, 10:33 AM

Last updated: Thu 2 Apr 2015, 4:00 AM

The Commerce Department report released on Friday showed the economy sinking much faster than the 3.8 per cent annualised drop for the October-December quarter first estimated last month. It also was considerably weaker than the 5.4 per cent annualised decline economists expected.

Looking ahead, economists predict consumers and businesses will keep cutting back spending, making the first six months of this year especially rocky.

“Right now we’re in the period of maximum recession stress, where the big cuts are being made,” said economist Ken Mayland, president of ClearView Economics.

The new report offered grim proof that the economy’s economic tailspin accelerated in the fourth quarter under a slew of negative forces feeding on each other. The economy started off 2008 on feeble footing, picked up a bit of speed in the spring and then contracted at an annualised rate of 0.5 per cent in the third quarter.

The faster downhill slide in the final quarter of last year came as the financial crisis the worst since the 1930s intensified.

Consumers at the end of the year slashed spending by the most in 28 years. They chopped spending on cars, furniture, appliances, clothes and other things. Businesses retrenched sharply, too, dropping the ax on equipment and software, home building and commercial construction.

Before Friday’s report was released, many economists were projecting an annualized drop of 5 per cent in the current January-March quarter. However, given the fourth quarter’s showing and the dismal state of the jobs market, Mayland believes a decline of closer to 6 per cent in the current quarter is possible.

The US unemployment rate is now at 7.6 per cent, the highest in more than 16 years. The Federal Reserve expects the jobless rate to rise to close to 9 per cent this year, and probably remain above normal levels of around 5 per cent into 2011.

A smaller decline in the economy is expected for the second quarter of this year. But the new GDP figure like the old one marked the weakest quarterly showing since an annualised drop of 6.4 per cent in the first quarter of 1982, when the country was suffering through an intense recession.

American consumers spooked by vanishing jobs, sinking home values and shrinking investment portfolios have cut back. In turn, companies are slashing production and payrolls. Rising foreclosures are aggravating the already stricken housing market, hard-to-get credit has stymied business investment and is crimping the ability of some consumers to make big-ticket purchases.

It’s creating a self-perpetuating vicious cycle that Washington policymakers are finding hard to break.

To jolt life back into the economy, President Barack Obama recently signed a $787 billion recovery package of increased government spending and tax cuts. The president also unveiled a $75 billion plan to stem home foreclosures and Treasury Secretary Timothy Geithner said as much as $2 trillion could be plowed into the financial system to jump-start lending.

For all of 2008, the economy grew by just 1.1 per cent, weaker than the government initially estimated. That was down from a 2 per cent gain in 2007 and marked the slowest growth since the last recession in 2001.

With Friday’s figures, Mayland lowered his forecast for this year to show a deeper contraction of just over 2 per cent.

In the fourth quarter, consumers cut spending at a 4.3 per cent pace. That was deeper than the initial 3.5 per cent annualised drop and marked the biggest decline since the second quarter of 1980.

Businesses slashed spending on equipment and software at an annualised pace of 28.8 per cent in the final quarter of last year. That also was deeper than first reported and was the worst showing since the first quarter of 1958.

Fallout from the housing collapse spread to other areas. Builders cut spending on commercial construction projects by 21.1 per cent, the most since the first quarter of 1975. Home builders slashed spending at a 22.2 per cent pace, the most since the start of 2008.

A sharper drop in US exports also factored into the weaker fourth-quarter performance. Economic troubles overseas are sapping demand for domestic goods and services.

Businesses also cut investments in inventories as they scrambled to reduce stocks in the face of dwindling customer demand another factor contributing to the weaker fourth-quarter reading.

Fed Chairman Ben Bernanke earlier this week told Congress that the economy is suffering a “severe contraction” and is likely to keep shrinking in the fix six months of this year. But he planted a seed of hope that the recession might end his year if the government managed to prop up the shaky banking system.

Even in the best-case scenario that the recession ends this year and an economic recovery happens next year, unemployment is likely to keep rising.

That’s partly because many analysts don’t think the early stages of any recovery will be vigorous, and because companies won’t be inclined to ramp up hiring until they feel confident that any economic rebound will have staying power.

More job losses were announced this week. JPMorgan Chase & Co. on Thursday said it would eliminate about 12,000 jobs as it absorbs the operations of failed savings and loan Washington Mutual Inc. That figure includes 9,200 cuts announced previously and 2,800 jobs expected to be lost through attrition.

Textile maker Milliken & Co. said it would cut 650 jobs at facilities worldwide, while jeweller Zale Corp. said it will close 115 stores and eliminate 245 positions.

On Monday, troubled flash memory maker Spansion Inc. said it will lay off about 3,000 employees and computer chip maker Micron Technology Inc. announced it will slash as many as 2,000 workers by the end of August.