U.S. Economy: GDP Shrinks 6.2%, More Than Estimated
The U.S. economic contraction in the fourth quarter was deeper than the government first estimated, with other reports today signaling little prospect of relief until at least the middle of 2009.
Gross domestic product shrank at a 6.2 percent annual pace from October through December, the most since 1982, the Commerce Department said today in Washington. Separate figures showed consumer sentiment and business activity dropped this month.
“There has been no evidence that the pace of decline is slowing at all,” Bill Cheney, chief economist at John Hancock Financial Services Inc. in Boston, said in an interview with Bloomberg Television. President Barack Obama’s $787 billion stimulus package will “kick in” in mid-2009 at the earliest, he said.
Consumer spending, which slid the most in almost three decades last quarter, is unlikely to turn around as companies from General Motors Corp. to JPMorgan Chase & Co. cut payrolls. The credit crunch shows no sign of ending, with the government today forced to come to the rescue of Citigroup Inc. for a third time in five months after mounting losses at the lender.
Stocks declined for the ninth time in 10 days, with the Standard & Poor’s 500 Stock Index falling 2.4 percent to close at 735.09. in New York. Treasuries fell for a fourth day amid concern over the ballooning cost of federal efforts to halt the crisis.
The Institute for Supply Management-Chicago Inc.’s barometer showed business activity contracted in February for a fifth consecutive month, while the Reuters/University of Michigan consumer sentiment index fell for the first time since November.
U.S. GDP was previously estimated to have declined by 3.8 percent last quarter. The 2.4 percentage-point revision was almost five times as large as the average adjustment, the Commerce Department said. The median forecast of 74 economists surveyed by Bloomberg News was for a 5.4 percent decline.
“This is the year of the great recession,” Jim Meil, chief economist for Eaton Corp., said at an analysts’ conference in New York today as the maker of fuel pumps and circuit breakers cut its 2009 profit forecast and announced a wage freeze. “At this point, there is no clear manifestation of a bend in the curve as a result” of Federal Reserve actions to unclog credit and lower interest rates, he said.
The world’s largest economy shrank at a 0.5 percent 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 percent 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 percent annual rate last quarter, the most since 1980, after falling at a 3.8 percent pace the previous three months. That marks the first time purchases have dropped by more than 3 percent in consecutive quarters since record-keeping began in 1947.
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 yesterday it lost $30.9 billion last year.
JPMorgan Chase, the second-biggest U.S. 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 a conference.
The Treasury Department today said it would convert as much as $25 billion of preferred shares in Citigroup into common stock provided private holders agree to the same terms. The conversion would give the U.S. a 36 percent stake in the New York-based company.
“It’s going to be a tough start to 2009,” Scott Davis, chief executive officer of United Parcel Service Inc. said yesterday 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.
Business purchases of new equipment plunged at a 29 percent pace, the most since 1958.
Cutbacks continue this quarter. Orders for durable goods in January fell 5.2 percent, marking a record sixth consecutive drop, Commerce said yesterday.
Collapse in Trade
The collapse in global trade subtracted half a 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 percent this year, the weakest postwar pace, indicating U.S. exports are likely to remain depressed.
Since taking office last month, President Obama has focused on three initiatives -- a $787 billion stimulus plan, a bank- rescue plan and an effort to limit home foreclosures -- while warning of economic “catastrophe” if the government doesn’t take aggressive action.
The GDP figure “denotes that the economy continued to deteriorate throughout the quarter and that acceleration got even greater,” said White House Press Secretary Robert Gibbs, as Obama returned from a speech in North Carolina.
Fed Chairman Ben S. Bernanke said this week the U.S. economy is in a “severe” contraction, and warned the recession may last into 2010 unless policy makers can stabilize the financial system.
The GDP report is the second for the quarter and will be revised in March as more information becomes available.