Just How Bad Is The Economy? Economist Nigel Gault explains that the drop in the gross domestic product announced last week — the biggest in 25 years — was lower than the drop in sales. This means that companies are making more things than they can sell, portending more bad economic news down the road.
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Just How Bad Is The Economy?

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Just How Bad Is The Economy?

Just How Bad Is The Economy?

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LIANE HANSEN, host:

This past week was full of more bad news about the economy. We heard that corporations, some of them big, stable ones, were cutting more jobs - tens of thousands of them. We heard that sales of new homes were down in December, again. Durable goods orders fell that same month by 2.6 percent. And the first fourth quarter estimates of the gross domestic product, that's the goods and services that the country actually produces, show the biggest decline in 25 years.

So the numbers don't look good. But what do they really mean? To help us understand, Nigel Gault joins us from Boston. He is the chief U.S. economist for IHS Global Insight, an economic research and forecasting firm. Welcome back to the program.

Dr. NIGEL GAULT (Group Managing Director, North American Macroeconomics, IHS Global Insight): Thank you.

HANSEN: Let's start with the GDP, the gross domestic product. Why the decline?

Dr. GAULT: It declined very sharply because spending really hit a brick wall when we got to the fourth quarter. What actually happened was the spending fell even faster than the production. The spending was down more than five percent, but GDP measures production. And because firms were actually accumulating unsold stocks of goods, a production decline, the GDP decline, was restricted to 3.8 percent.

But of course, that's bad news for the future because it means that firms are piling up stocks of goods that people don't want to buy. And that says they're going to be cutting their production back even further in the first quarter.

HANSEN: So then, the prospects for the future if they're cutting back, that means more unemployment numbers.

Dr. GAULT: That's right. If firms are cutting back production, it means they need less people to produce those goods. And it means that the orders that any particular firm places with other firms for raw materials or the like, those will be reduced. So these production declines essentially cascade through the economy.

HANSEN: What about the stimulus packages that are being considered in Washington? I mean, there's the current one, some future one. Do you think that's going to help?

Dr. GAULT: I think it will help, but I don't think that people should expect that it's going to make a big difference very quickly. The downward momentum of the economy now is very, very steep. The stimulus package is going to kick in gradually over the course of 2009, and I think its biggest effect is not going to come until 2010.

HANSEN: Are there important things to watch for in the coming weeks and months, do you think?

Dr. GAULT: We need to watch what's happening to consumer and business spending. Are there any signs that the downward momentum in consumer spending and business spending is starting to ease? So, what we're looking for now is not signs that things are starting to turn up, we're just looking to see if we can see any signs that things are getting worse a bit more slowly. Unfortunately at the moment, we don't have those signs.

HANSEN: Nigel Gault is the chief U.S. economist for IHS Global Insight. Thank you for your time.

Dr. GAULT: Thank you.

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