Consumer spending declined at the fastest pace in three decades.
The US economy shrank in the fourth quarter at a faster pace than previously estimated as consumer spending plunged, companies cut inventories and exports sank.
Gross domestic product contracted at a 6.2 per cent annual pace from October through December, more than economists anticipated and the most since 1982, according to revised figures from the Commerce Department on Friday in Washington. Consumer spending, which comprises about 70 per cent of the economy, declined at the fastest pace in almost three decades.
The recession is forecast to persist at least through the first half of this year as job losses mount and purchases plummet. The Obama administration’s attempts to break the grip of the worst financial crisis in 70 years are unlikely to bring immediate relief as companies from General Motors Corp to JPMorgan Chase & Co cut payrolls.
“There has been no evidence that the pace of decline is slowing at all, there are other shoes waiting to drop,” Bill Cheney, chief economist at John Hancock Financial Services Inc. in Boston, said in an interview with Bloomberg Television. “There is a chance that the stimulus package will kick in” in the middle of this year, he said.
Stocks drop
Stocks fell, with the Standard & Poor’s 500 Index dropping 0.8 per cent to 746.96 at 10.51 am in New York.
US manufacturing shrank in February and confidence among consumers declined, private reports on Friday showed. The Institute for Supply Management-Chicago Inc’s business barometer showed a contraction for a fifth consecutive month, while the Reuters/University of Michigan final index of consumer sentiment fell for the first time since November.
GDP was projected to contract at a 5.4 per cent annual pace last quarter, according to the median estimate of 74 economists surveyed by Bloomberg News. Forecasts ranged from declines of 3.8 per cent to 6 per cent.
The 2.4 percentage-point revision was almost five times as large as the average adjustment, Commerce said.
The world’s largest economy shrank at a 0.5 per cent annual rate from July through September. The back-to-back contraction is the first since 1991.
For all of 2008, the economy expanded 1.1 per cent as exports and government tax rebates in the first six months helped offset the deepening slump in consumer spending that followed.
Consumer spending dropped at a 4.3 per cent annual rate last quarter, the most since 1980, after falling at a 3.8 per cent pace the previous three months. That marks the first time purchases have dropped by more than 3 per cent in consecutive quarters since record-keeping began in 1947.
Payroll declines
Americans may further reduce spending as employers slash payrolls. Companies cut 598,000 workers in January, bringing total job cuts to almost 3.6 million since the recession started in December 2007.
More cutbacks are on the way. General Motors, which is seeking $16.6 billion in new federal loans, said this month it is cutting another 47,000 jobs globally. The company reported on Thursday it lost $30.9 billion last year.
JPMorgan Chase, the second-biggest US bank, may cut headcount in its investment bank by as much as 2,000, Steven Black, co-head of the New York-based company’s investment bank said yesterday at an investor conference.
The New York-based lender also said it will eliminate 2,800 jobs at Washington Mutual through attrition, bringing to 12,000 the total number of positions lost since the bank purchased the failed thrift in September.
Saks Inc. and Macy’s Inc are among retailers also cutting jobs.
‘“It’s going to be a tough start to 2009,” Scott Davis, chief executive officer of United Parcel Service Inc said on Thursday during a speech in Washington. “The best case we can see out there is maybe some growth in the second half.”
Companies trimmed inventories at a $19.9 billion annual rate last quarter rather than allowing them to swell at a $6.2 billion pace as previously reported. The updated reading accounted for half of the 2.4 percentage-point reduction in growth.
Purchases of new equipment also plunged last quarter. Business investment dropped at a 21 per cent pace, the most since 1980. Spending on equipment and software dropped at a 29 per cent pace, the most since 1958.
Cutbacks continue this quarter. Orders for durable goods in January fell 5.2 per cent, marking a record sixth consecutive drop, Commerce said on Thursday.
Collapse in trade
The collapse in global trade subtracted a half percentage point from growth last quarter, compared with the 0.1 point gain projected in the advance report. The International Monetary Fund said last month the global economy will grow 0.5 per cent this year, the weakest postwar pace, indicating US exports are likely to remain depressed.
The slump in home construction accelerated, contracting at a 22 per cent pace last quarter after a 16 per cent drop in the previous three months, Friday’s report showed. Housing is likely to remain a drag on growth as Commerce figures last week showed US builders broke ground in January on the fewest houses on record.
Since taking office last month, President Barack Obama has focused on three initiatives, a $787 billion stimulus bill, a bank-rescue plan and an effort to limit home foreclosures, while warning of economic “catastrophe” if the government doesn’t take aggressive action.
“Today’s revised GDP shows we’re in a deep recession,” US Representative Carolyn Maloney, a New York Democrat and head of Congress’s Joint Economic Committee, said in a statement. “The American people are struggling and will continue to do so until we can get credit flowing and people working again.”
Federal Reserve Chairman Ben S Bernanke said this week the US economy is in a “severe” contraction, and warned the recession may last into 2010 unless policy makers can stabilise the financial system.
The GDP report is the second for the quarter and will be revised in March as more information becomes available.
