Economy shrinks, pointing to trying times to come

McClatchy NewspapersJanuary 30, 2009 

WASHINGTON — As bad as Friday's grim government report on economic growth was, it points to even worse times ahead.

The collapse of exports, industrial production and the inability of companies to sell their products all portend an even deeper contraction as the U.S. and global economies sink further in the weeks and months to come.

The Commerce Department reported that the U.S. economy contracted 3.8 percent in the final three months of last year, the biggest such quarterly shrinkage in almost 27 years.

Economists had been expecting a contraction of 5.5 percent or more, and after the initial cheer Friday the number was quickly determined to be less than advertised.

That's because business inventories — the goods that retailers couldn't sell to consumers and manufacturers — skewed Friday's report on the nation's gross domestic product. Inventories swung from a $30 billion reduction in the third quarter to a buildup of more than $6 billion in the final three months. Consumers were on strike, and companies couldn't get rid of goods.

"The increase in inventories means that growth in the current quarter will be worse than previously expected; probably closer to negative 5 percent. The worst of the downturn wasn't in our past, it is in our future," said Mark Zandi, the chief economist for forecaster Moody's Economy.com in West Chester, Pa.

When inventories are subtracted from the equation, the contraction in U.S. economic growth was 5.1 percent, the low end of the dismal range that economists had expected. It's also the amount by which Zandi and other economists think that the U.S. economy will contract in the first three months of this year.

Behind the buildup in inventories is the American consumer, bruised and battered, retrenching for better days and on the sidelines for the foreseeable future.

"With unemployment rising and incomes weakening, we expect consumption spending will fall again in the first quarter," Gary Bigg, a Bank of America economist, said in a research note. Consumers drive about two-thirds of all U.S. economic activity.

The fourth-quarter decline in the GDP follows a 0.5 percent contraction in the third quarter. The National Bureau of Economic Research has said that the U.S. economy entered a recession in December 2007.

Presuming that it lasts beyond May, which virtually all economists now expect, this recession will be the longest and perhaps deepest period of economic decline in the United States since the Great Depression.

In a statement, the chairman of the White House Council of Economic Advisers, Christina Romer, said that Friday's numbers indicated clearly that the U.S. recession was worsening.

"The large decline confirms the evidence from other indicators, such as payroll employment and the unemployment rate, that the U.S. economy continues to contract severely," she said. "Aggressive, well-designed fiscal stimulus is critical to reversing this severe decline and putting the economy on the road to recovery and improved long-run growth."

The House of Representatives has passed an economic stimulus bill, which includes spending provisions and tax cuts that'll cost the taxpayers more than $819 billion. The Senate will begin voting on its version next week. Congressional leaders in both parties have promised to send a stimulus bill to President Barack Obama by mid-February.

Other signs of further trouble were deeper in the GDP data.

"The decline in motor vehicle output was particularly severe, accounting for 2 percentage points of the overall fall in GDP of 3.8 percent. This widespread decline emphasizes that the problems that began in our housing and financial sector have spread to nearly all areas of the economy," Romer said. "Immediate action to support both the financial sector and overall demand is essential."

A sign of how the rising tide of global trade is receding in a global slowdown also was deep in the data.

"As if to rub salt in the wound, gross exports plunged nearly 20 percent, a byproduct of recession in most foreign countries," Jay Bryson, a global economist with Wachovia in Charlotte, N.C., wrote in a research note to investors.

Just a day earlier, industrial production data pointed to a global downturn that's picking up steam. December orders for durable goods — big-ticket items that don't wear out, such as cars, electronic equipment and appliances — fell 2.6 percent from the previous month.

"In the final three months of 2008, durable goods orders are 17 percent below the same period one year ago," said Daniel J. Meckstroth, the chief economist for the research group Manufacturers Alliance/MAPI. "Orders for nondefense capital goods excluding aircraft, an indicator of private equipment spending, fell 2.8 percent in December and for the fourth quarter were 7 percent below their level one year ago. The consumer-led recession has lowered factory operating rates and created economywide slack."

Translation: The economy is shutting down and the decline in exports exacerbates this, particularly for the equipment industries that were until recently one of the few economic bright spots.

"An improvement in the gloomy conditions for capital goods, unfortunately, will not occur until late this year. Businesses first need to see positive signs that credit is available and consumers are willing to spend again," Meckstroth said.

Friday's GDP numbers highlight the urgency to address interrelated factors that are hurting the U.S. economy.

"Given the seizure of credit and the reticence of consumers to spend on big-ticket items, not surprisingly, the hefty decline in auto sales had a meaningful impact on growth," Bill Knapp, the chief investment strategist for MainStay Investments, part of the New York Life Insurance, said in a research note.

Fixing problems in the credit markets will allow money to flow to consumers, who then presumably will begin buying cars again. If lending remains frozen, idle plants and more layoffs await.

As it stands, this week brought more than 80,000 job cuts announced at major U.S. corporations such as Home Depot, Microsoft, Caterpillar and other major companies. The Labor Department reported Thursday that more than 4.7 million Americans have drawn jobless benefits for a week or longer, the highest amount since such recordkeeping began in 1967.

Another 588,000 Americans sought first-time jobless benefits for the week that ended Jan. 17, suggesting that January's job losses, when they're reported at the end of next week, probably will exceed half a million workers for the fourth consecutive month.

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