GDP Shrank 6.2% in 4th Quarter

WASHINGTON -- The U.S. recession deepened a lot more in late 2008 than first reported, according to government data showing a big revision down because businesses cut supplies to adjust for shriveling demand.

Gross domestic product decreased at a seasonally adjusted 6.2% annual rate October through December, the Commerce Department said Friday in a new, revised estimate of fourth-quarter GDP.

The 6.2% decline meant the worst quarterly showing for GDP since a 6.4% decrease in first-quarter 1982 GDP.

In its original estimate, issued a month ago, the government had reported fourth-quarter 2008 GDP fell 3.8%. The sharply lower revision to a decline of 6.2% reflected adjustments downward of inventory investment, exports and consumer spending.

The report showed businesses inventories shrank $19.9 billion in the fourth quarter, instead of rising by $6.2 billion as Commerce originally estimated. Third-quarter inventories fell by $29.6 billion in the third quarter.

Falling prices -- oil is a good example -- likely contributed to the fourth-quarter drop in inventories. But companies also likely liquidated stocks of goods to adjust for retreating demand amid the recession, which began in December 2007.

The inventory revision in Friday's report was good and bad. Bad, because the $19.9 billion drop meant inventories added a mere 0.16 of a percentage point to GDP in the fourth quarter, instead of adding 1.32 percentage points as reported originally. But the drop also suggests there is less of an inventory overhang, a bit of good news. Still, inventory-to-sales ratios have gone up, an unwelcome sign. Excess inventory will have to be worked off, and that signals production cuts, which, in turn, could mean layoffs and further impair the economy. Experts see a large drawdown of stockpiles during the first half of 2009 and expect a big drop in GDP during the current, first quarter.

The National Association of Business Economics sees a 5.0% contraction in first-quarter GDP and a 1.7% drop in the second quarter. The latest survey of the group's forecasters was released Monday; 47 of them were polled Jan. 29 to Feb. 12. They see a modest upturn in the second half of 2009, a sub-par increase of 1.6%. For 2010, growth is projected at 3.1%.

A research firm, Macroeconomic Advisers, thinks GDP will fall 5.5% January through March. It lowered its forecast on Thursday from a decline of 5.1% after reviewing bad data about the manufacturing sector that showed orders for expensive, durable factory goods tumbled in January much more than Wall Street had expected.

GDP is a measure of all goods and services produced in the economy. GDP fell 0.5% in the third quarter of 2008. The 6.2% decrease in the fourth quarter surprised Wall Street. Economists surveyed by Dow Jones Newswires forecast the revision would show a smaller, 5.4% decrease.

Gauges measuring prices within the GDP data generally fell, as the economy slumps badly.

Trade took a bite out of the economy in the fourth quarter, the data revisions revealed. U.S. imports fell 16.0% instead of 15.7% as originally reported. Exports were revised down, dropping 23.6% instead of falling 19.7%. Trade reduced GDP by 0.46 of a percentage point in the fourth quarter. Originally, trade was seen adding 0.09 of a percentage point to GDP.

Businesses decreased spending more than previously thought. Outlays fell by 21.1% October through December, lower than the originally estimated 19.1% decrease. Business spending fell 1.7% in the third quarter. Fourth-quarter investment in structures decreased 5.9%. Equipment and software plunged 28.8%.

Fourth-quarter spending by consumers tumbled 4.3%, down from a previously reported 3.5% decrease and below the third quarter's 3.8% decline. Consumer spending accounts for about 70% of economic activity. It cut 3.01 percentage points out of GDP in the fourth quarter, instead of the tamer reduction of 2.47 percentage points initially thought.

Purchases of durable goods plunged 22.1% in October through December, a bit up from the previously reported 22.4% decrease but below a decline of 14.8% in the third quarter. Durable goods are expensive items designed to last at least three years, like cars, which aren't selling well because the U.S. has lost 3.6 million jobs since the recession began and people are afraid of making large purchases.

Fourth-quarter non-durables spending tumbled by 9.2%. Services spending went 1.4% higher.

The sick housing sector undercut GDP sharply. Residential fixed investment decreased by 22.2% in the fourth quarter, a smaller drop than the originally estimated 23.6% but bigger than a third-quarter spending drop of 16.0%.

The sector became overbuilt in a boom that turned bust in a big way. Receding demand pushed up supplies of unsold homes, forcing down prices and undercutting sales further. Many home builders have thrown in the towel. Home construction in January was 56.2% below the pace a year earlier.

Real final sales of domestic product, which is GDP less the change in private inventories, decreased by 6.4% in the fourth quarter, a revision down from an originally estimated 5.1% decrease. Third-quarter sales fell by 1.3%.

Federal government spending investment increased by 6.7% in the fourth quarter, a bigger climb than the originally estimated 5.8% increase. Third-quarter spending rose by 13.8%. State and local government outlays fell 1.4% in the fourth quarter.

Revisions to inflation gauges within the report were mixed.

The government's price index for personal consumption expenditures decreased 5.0%, smaller than the previously estimated 5.5% drop. The index rose in the third quarter by 5.0%.

The PCE price gauge excluding food and energy increased 0.8%, a bit above the previously estimated 0.6% increase but below the third quarter's 2.4% increase.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, decreased 4.1%, falling less than the previously estimated 4.6% decrease. The index climbed by 4.5% in the third quarter.

The chain-weighted GDP increased 0.5%. Originally, the index was seen dipping 0.1%. It rose 3.9% in the third quarter.