Economy Shrinks 3.8%, Less Than Expected
Kurt Brouwer January 30th, 2009
GDP Drops at 3.8% Rate as Spending Falls (Wall Street Journal, January 28, 2009, Jeff Bater & Brian Blackstone)
The U.S. economy shrank at the end of 2008 by the most in 26 years, according to a grim report Friday that hints the recession will deepen in 2009.
Gross domestic product fell at a seasonally adjusted 3.8% annual rate October through December, the Commerce Department said in the first estimate of fourth-quarter GDP.
Third-quarter GDP fell 0.5%. The back-to-back GDP declines were the first since GDP fell 3.0% in the fourth quarter of 1990 and 2.0% in the first quarter of 1991…
While the 3.8% decline marked the weakest GDP performance since a 6.4% drop in first-quarter 1982, it was still smaller than expected. Economists surveyed by Dow Jones Newswires forecast a 5.5% drop in GDP during the last three months of 2008.
In a short-term sweet but probably long-term bitter turn, inventories rose at the end of 2008. The inventory increase was troubling because it was likely unintended — the result of companies getting stuck with unwanted merchandise because demand has tailed off in the recession. Excess inventory will have to be worked off down the road and that signals production cuts, which in turn could mean layoffs that hamstring the economy even more.
“With inventory investment jumping in (the fourth quarter), there will be inventory liquidation in (the first quarter),” Insight Economics analyst Steven Wood said. “This suggests that (first-quarter) GDP will also contract, probably more sharply than it did in (the fourth quarter).”
Inventories increased by $6.2 billion in the fourth quarter, after going down $29.6 billion in the third quarter and $50.6 billion in the second quarter. The climb added 1.32 percentage points to GDP. Real final sales of domestic product, which is GDP less the change in private inventories, decreased 5.1% in the fourth quarter, after falling by 1.3% in the third quarter…
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