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GDP slides 6.2% on slower spending

A revised reading on fourth-quarter gross domestic product was its worst in 26 years.

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By Ben Rooney, CNNMoney.com staff writer

When will the economy begin to turn around?
  • Later this year
  • Early next year
  • Late in 2010
  • In 2011 or after

NEW YORK (CNNMoney.com) -- The nation's economic slide during the last three months of 2008 was even sharper than previously estimated, with the broadest gauge of economic activity suffering its worst decline in 26 years, the government reported Thursday.

Gross domestic product, which measures the output of goods and services produced in the United States, fell at an annual rate of 6.2% in the fourth quarter, adjusted for inflation, according to a preliminary report from the Bureau of Economic Analysis.

The decline was worse than the 3.8% drop that the BEA reported in last month's "advance" reading on fourth-quarter GDP. It was the largest drop in GDP since the first quarter of 1982, when the economy suffered a 6.4% decline.

The reading was also much worse than the 5.4% decline economists surveyed Briefing.com had expected.

"Things are just terrible out there," said Gus Faucher, director of macroeconomics at Moody's economy.com.

After a 0.5% decline in the third quarter, a 6.2% contraction reflects how severe the economic downturn was at the end of last year, and highlights concerns about the economy going forward.

GDP is expected to shrink another 5% in the first quarter before recovering in the second half of the year, according to Moody's economy.com.

Among the main drivers of the decline was a 4.3% drop in consumer spending, which makes up two-thirds of the nation's overall economic activity.

As consumers cut back on spending amid rising unemployment, businesses have reduced their inventories to compensate for falling revenues.

Businesses trimmed inventories by nearly $20 billion in the fourth quarter, after cutting $29.6 billion in the previous quarter. In its advance GDP report, the BEA said business inventories grew by $6.2 billion.

The decline in inventories is a positive sign, according to Faucher. "Businesses are burning through inventories more quickly," he said.

"That means that once demand starts to turn around, they'll have to increase production quicker," which could boost GDP going forward, he said.

For the meantime, however, spending on equipment and software fell at a 29% annual rate, reflecting decreased spending by businesses.

A big drop in exports also contributed to the decline, while an increase in government spending helped offset some of those declines.

Exports plummeted at a 23.6% annual rate in the fourth quarter, versus an increase of 0.3% in the previous quarter.

Earlier in 2008, robust demand for U.S. exports helped keep GDP in positive territory. But that demand has evaporated as the global economy continues to deteriorate.

Meanwhile, government expenditures and investments increased at a 6.7% annual rate in the fourth quarter, down from a 13.8% increase in the third quarter.

The BEA will report its final reading on fourth-quarter GDP on March 26. To top of page

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