The US economy shrank at its fastest pace in nearly 27 years in the fourth quarter, government data showed on Friday, sinking deeper into recession as consumers and business cut spending. In a report that showed a broad-based contraction nearly across all sectors, the Commerce Department said gross domestic product, which measures total goods and services output within US borders, plummeted at a 3.8 percent annual rate.
That was the biggest drop since the first quarter of 1982, when output contracted 6.4 percent, and highlighted that the housing-led recession, which started in December 2007, was gathering momentum. These were the first consecutive declines in GDP since the fourth quarter of 1990 and the first three months of 1991.
Analysts polled by Reuters had forecast GDP contracting 5.4 percent in the fourth quarter after a 0.5 percent drop in the third quarter. They said the depth of the economic decline in the fourth quarter could have been masked by the $6.2 billion build up in inventories. "I think the numbers are weaker than the better-than-expected headline reading suggests because the miss was mainly in what could have been an involuntary increase in inventories," said Dana Saporta, analyst at Dresdner Kleinwort in New York.
US equity index futures reversed losses to trade higher after smaller-than-expected contraction in GDP. US Treasury debt prices pared gains, while the dollar pared gains against the euro. For 2008, GDP rose 1.3 percent, the slowest pace of growth since 2001, when the economy expanded 0.8 percent.
The advance report from the Commerce Department showed consumer spending, which accounts for two-thirds of US economic activity, fell 3.5 percent in the fourth quarter after declining 3.8 percent in the third quarter. It was also the first consecutive drops since the last quarter of 1990 and the first quarter of 1991. Spending on durable goods like cars and furniture plunged 22.4 percent, the steepest decline since the first quarter of 1987.
Falling house prices, coupled with the stock market collapse and tight access to credit, have hit consumer spending. In response to the slump in demand, investment by business slumped 19.1 percent for the sharpest pull-back since the first quarter of 1975. Residential investment plummeted 23.6 percent. Exports of goods and services plunged 19.7 percent, the biggest drop since the third quarter of 1974.
The sharp economic downturn is putting a lid on inflation pressures, with the personal consumption expenditures price index plunging a record 5.5 percent after rising 5 percent in the third quarter. Excluding volatile food and energy items, core prices grew at a muted 0.6 percent, the slowest rate since the fourth quarter of 1962. Core PCE rose 2.4 percent in the third quarter. Analysts polled by Reuters had forecast the PCE index falling 5.4 percent.
Separately, the weak jobs market pinched wages and benefits, with the Labour Department's Employment Cost Index rising just 2.6 percent last year, the slowest rise since records began in 1982. Employment costs in the fourth quarter increased by 0.5 percent, less than the 0.7 percent rate forecast by economists, as both wage and benefit growth slowed.
CONSUMERS' MOOD IMPROVES US consumer confidence rose to a four-month high in January, helped by optimism that President Barack Obama's new administration might bring relief from a year-long recession, a survey showed on Friday. However, the improvement was less than economists had expected and sentiment remained weak overall, The Reuters/University of Michigan Surveys of Consumers said its final index reading of confidence for January rose to 61.2 from December's 60.1.
The final January reading is down slightly from the preliminary result earlier in the month of 61.9 and overall it remains in depressed territory, reflecting the deepening recession in the world's largest economy. Five-year inflation expectations increased to 2.9 percent from 2.6 percent. Despite the increase in the overall sentiment index, consumers rated their current economic conditions worse than the month before, with this gauge falling to 66.5 from 69.5.
The University of Michigan confidence index dates back to 1952 and is still mired near the record low of 51.7 hit in May 1980. "Nearly all consumers now anticipate the deepest and longest recession in the post-World War Two era, but consumers do not expect the economy to sink into a 1930s-style depression," the Surveys of Consumers said.