U.S. Economy Shrinks In Last Quarter Of '08

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The economy shrank at a pace of 3.8 percent in the final three months of last year, the worst performance in more than two decades. At the White House, President Barack Obama took note as he was launching a task force to focus on helping the middle class.

ROBERT SIEGEL, host:

The grim financial numbers got even worst today. The last three months of 2008 brought the worst performance of the U.S. economy in more than 26 years. Now that may not be news for most Americans, but the troubling details were all there today in the government's report on the fourth quarter gross domestic product. NPR's John Ydstie has more.

JOHN YDSTIE: The headline in the government's report was that the U.S. economy was shrinking at a 3.8 percent annual rate at the end of last year. At the White House, President Obama took note as he was launching a task force to focus on helping the middle class.

President BARACK OBAMA: This isn't just an economic concept. This is a continuing disaster for America's working families. As worrying as there numbers are, it's what they mean for the American people that really matters and that's so alarming. Families making fewer purchases, businesses making fewer investments, employers sustaining fewer jobs.

YDSTIE: Indeed, families making fewer purchases and businesses making fewer investments were a huge reason for the sharp downturn in the economy at the end of last year. For the second straight quarter consumer spending fell more than three percent. It's the first time that's happen since the government started keeping track back in 1947. Businesses closed up their wallets, too. A collapse in business investment and things like buildings and new machines was responsible for shaving almost two percentage points off of GDP.

Mr. DYKE MESSENGER (President, Power Curbers Inc., North Carolina): The last quarter of 2008 was awful.

YDSTIE: Dyke Messenger is the president of Power Curbers, a North Carolina company that manufactures machines that makes street curbs and gutters.

Mr. MESSENGER: We cut investments to basically to zero, only what we needed to make to repair machine or vehicles to keep things going. There was no need for any capital investment at all.

YDSTIE: Demand from Messenger's curb-making machines had already fallen in the United States by the middle of last year because the housing crisis halted the construction of streets for subdivisions. But developers the government overseas, especially in oil-rich economies, did continue to buy the machines until the credit crunch and the collapse of commodity markets stopped those orders at the end of 2009. Finally, Messenger was force to layoff 30 employees, more than a quarter of his workforce.

Actually, the top line in today's report, a 3.8 percent drop in output, wasn't quite as disastrous as had been expected. On average, analysts had expected a huge five and a half percent plunge. But Bill Cheney, chief economist to John Hancock Financial, says there's no reason to be relieved.

Mr. BILL CHENEY (Chief Economist, Bill Hancock Financial): The only reason why it came in less awful than it was expected was because of a large item called inventory investment, which basically means goods were piling up unsold.

YDSTIE: Those piles of unsold goods mean there'll be even less demand in the coming months and so fewer jobs for workers. Cheney believes the U.S. economy has not yet hit bottom, and in fact, that the decline is still accelerating. At this point, says Cheney, stimulus from the federal government is the only hope.

Mr. CHENEY: We've got consumers cutting back, businesses cutting back, foreigners aren't spending money, our exports are going down, state and local governments are cutting back. The only potential spender out there is the federal government.

YDSTIE: But Cheney thinks the stimulus package working its way through Congress needs more bang in the early months. He recommends bigger tax cuts and more funding for current government programs like student loans and research grants that have an infrastructure in place to spend the money immediately. John Ydstie, NPR News Washington.

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U.S. GDP Falls At 3.8 Percent Pace In 4th Quarter

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The U.S. economy shrank at an annual rate of 3.8 percent in the last three months of 2008 as factory production ground down, department stores slashed prices and virtually every sector of the economy bled jobs, the Commerce Department reported Friday.

The quarterly calculation on gross domestic product was the worst since the first quarter of 1982, when the economy contracted by 6.4 percent amid another recession.

The figure showed how rapidly the economy was contracting. In the previous quarter, the economy slipped 0.5 percent.

For all of 2008, GDP rose 1.3 percent, the slowest growth since 2001, when the economy expanded 0.8 percent. In 2007, the GDP increased by 2 percent.

The Commerce report showed consumer spending — which accounts for a whopping two-thirds of U.S. economic activity — fell another 3.5 percent in the fourth quarter after declining 3.8 percent in the third quarter. Spending on durable goods such as cars and furniture plunged 22.4 percent, the steepest decline since the first quarter of 1987.

The grim quarterly GDP was leavened slightly: It is better than economists expected. Economists surveyed before the report were anticipating a 5.4 percent quarterly drop. However, the figure could be revised lower as new survey data are obtained.

What began as a mortgage and credit crisis that hit financial institutions and the construction industry last year has spread quickly to nearly every sector of the economy, from heavy equipment to electronics and pharmaceuticals.

Consumers have responded by cutting back drastically on spending as they worry about holding onto their jobs, making their mortgage payments, and retaining value in their financial investments.

The latest figures will certainly intensify the debate over the Obama administration's economic stimulus package, which passed the House on Thursday on a strict partisan vote. No Republicans signed on to the plan. The Senate is expected to vote on the plan next week.

Christina Romer, the chair of the White House Council of Economic Advisers, said the latest figures show that "immediate action to support both the financial sector and overall demand is essential."

"Aggressive, well-designed fiscal stimulus is critical to reversing this severe decline and putting the economy on the road to recovery and improved long-term growth," she said.

Earlier this week, a survey released by the National Association for Business Economics, or NABE, pointed to the worst business conditions in more than a quarter century and the likelihood of many more job losses in coming months.

From NPR staff and Associated Press reports.

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