The United States economy shrank at its fastest pace in a quarter-century from October through December, the government reported on Friday, as consumer spending and business investment collapsed, signaling more economic contraction in the months ahead. þþIn the broadest official accounting of the toll of the credit crisis, the government reported that gross domestic product shrank at an annual rate of 3.8 percent in the fourth quarter of 2008. While that was less than economists’ expectations of a 5.5 percent drop, the decline would have been much steeper — more than 5 percent — if shipments of goods had fallen as sharply as orders.þþPresident Obama seized on the figures Friday morning, calling the contraction a “continuing disaster” for working families, and again urged Congress to pass a package of tax cuts and spending. The House, divided on party lines, passed an $819 billion stimulus plan on Wednesday, and Senate is expected to take up the measure next week. þþ“What we can’t do is drag our feet or delay much longer,” Mr. Obama said. “The American people expect us to act.”þþThe president also announced the first meeting of a Task Force on Middle-Class Working Families, which will seek to raise living standards of working families. .þþWall Street tumbled after the numbers were released. The Dow Jones industrial average fell more than 100 points in midday trading, and the broader Standard & Poor’s 500-stock index was down 1.5 percent.þþThe slide in gross domestic product — a crucial measure of economic health — is likely to continue at an alarming pace well into the summer as consumers continue to curtail spending and businesses reduce their capital investments and cut their payrolls, economists said. þþIn the fourth quarter, rising inventories accounted for the difference between the overall 3.8 percent contraction of the economy and a steeper 5.1 decline in final domestic sales. þþ“The difference between 3.8 and 5.1 percent is the inventory buildup,” Nigel Gault, chief United States economist at IHS Global Insight, said. “My only explanation is that companies could not cut production fast enough.”þþWith inventory accumulation gone, the economy will contract in the first quarter at more than a 5 percent annual rate, Mr. Gault said.þþEmployers reduced their corporate investments in computers, office equipment, machinery and other capital goods by an annualized 19.1 percent in the fourth quarter.þþTrade fell, as Americans bought fewer Asian-made televisions and computers, and global demand for American goods and services ebbed. Exports in the fourth quarter declined 19.7 percent while imports dropped 15.7 percent.þþJosh Bivens, an economist at the Economic Policy Institute, said that the drop in exports was distressing because of their contribution to growth in recent years.þþ“That’s been a real key strength to the economy,” Mr. Bevins said. “They were punching above their weight for a couple of years, but they have really collapsed.”þþAnd American consumers, who took on home equity loans and large amounts of credit card debt to finance their lifestyles earlier in the decade, curtailed their spending for a second consecutive quarter. Consumer spending, which typically accounts for two-thirds of economic growth, fell 3.5 percent in the quarter, after decreasing 3.8 percent in the third quarter.þþWith no end in sight to the downturn, the stark numbers on Friday are likely to intensify the debate over an enormous stimulus plan moving through Congress. þþChristina D. Romer, chairwoman of President Obama’s Council of Economic Advisers, said the report offered more evidence that the economy continued to contract severely, and said “immediate action” was needed to shore up the financial sector and broader demand.þþ“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,” Ms. Romer said Friday in a statement.þþMichael E. Feroli, a United States economist at JPMorgan Chase, said, “The fact that you’re not seeing any evidence that things are turning for the better has added quite a bit to the urgency to get things done and do something substantial.” þþThe House, divided along partisan lines, passed an $819 billion package of tax cuts and spending on Wednesday, and the Senate is to begin debating its version of the package on Monday. President Obama and most Democrats support the plan, but not a single Republican has voted for it.þþWhile many economists say the stimulus is crucial to replace a paucity of private spending and investment, they are concerned that the tax cuts in the Democratic plan will not be particularly useful, and that more effective spending proposals will take too long to put in place.þþ“It’s badly needed, and as quickly as possible,” Mr. Gault said. “You’d like to be able to inject a huge amount of stimulus very quickly, but how practically can that be done? Practically speaking, you can’t spend the money that fast.”þþThe pace of contraction in the fourth quarter was the steepest since 1982, when the economy shrank at an annual rate of 6.4 percent in the first three months of the year, after the Federal Reserve limited bank borrowing as a means of strangling inflation.þþBut it may be more difficult to pull the country out of this recession than the downturn of the 1980s, when the Federal Reserve helped stimulated growth by slashing interest rates. In December, the Fed cut its target overnight rates to a record low near zero percent, exhausting one of its crucial weapons.þþ“They’re running out of options,” said Ann L. Owen, associate professor at Hamilton College and a former Fed economist. “They’ve got the Fed funds rate down to basically zero. They’re talking about buying Treasuries. It’s not really clear what kind of effect they can have on the economy.”þþAlthough the recession officially began 13 months ago, as the housing market soured and energy prices pinched consumers, the gross domestic product continued to grow slowly in 2008 until the third quarter, when it contracted at an annual rate of 0.5 percent. þþThe turmoil in the last three months of the year reflected widespread havoc in the economy. Housing prices fell at their fastest pace on record, credit markets dried up and billions of dollars’ worth of bad mortgage debt threatened the stability of the country’s largest financial institutions. þþBecause of their losses, many banks pulled back on lending, and even healthy ones tightened lending standards for those who still had a stomach to borrow.þþBusinesses reeled from falling sales and dim prospects for growth. Employers like Microsoft, Starbucks, Sprint and Home Depot have cut thousands of jobs as they prepare for a difficult year. Unemployment now stands at 7.2 percent, and some economists said that jobless rates could hit 9 percent as the recession spreads like an oil slick. þþ“It’s a severe contraction,” said Mickey Levy, chief economist at Bank of America. “No sector of the economy is safe right now.”þþ
Source: NY Times
