Economy: Worst in 26 years

ROAD TO RESCUE

• Home prices up for 1st time in 3 years
• New home sales: 'Really good news'
• Wall Street: Here comes the hard part
• 7 regional banks fail
• Banker: "TARP helped avert a global calamity"

NEW YORK (CNNMoney.com) -- The government confirmed Thursday that the U.S. economy suffered its largest drop in 26 years during the fourth quarter.

The nation's gross domestic product, the broadest measure of economic activity, fell at an annual rate of 6.3% during the final three months of 2008. That's slightly worse than the government's previous estimate of a 6.2% drop in the period.

Economists surveyed by Briefing.com had forecast that GDP would fall at a 6.6% rate in the latest reading.

The drop is the biggest one-quarter decline in this key measure since the first three months of 1982.

The report showed broad based declines across various measures of economic activity. Spending by consumers fell at a 4.3% rate, with purchases of large ticket items plunging 22%. Investment in housing fell 23% from already depressed levels, completing three straight years of declines in that sector.

Investment in equipment and software, taken as a measure of business spending, plunged at a 28% rate. Exports tumbled at a 24% rate.

The economic problems have obviously not ended with the fourth quarter report. Economists surveyed by the National Association for Business Economics forecast a 5% rate of decline in the first quarter, which ends Tuesday, followed by a 1.7% drop in the second quarter.

Still, Bernard Baumohl, executive director of The Economic Outlook Group, said that some recent economic readings on housing and retail sales that have come in better than expected in the last couple of weeks suggest that the recession may be approaching a bottom.

"I'm much more encouraged than I was at the end of 2008," he said. "I think it's winding down."

Baumohl added there could be a slight improvement in GDP the second half of this year, but the economy is likely to stay sluggish well into 2010.

But other economists say it's too soon to say the worst is over. Brian Bethune, chief U.S. financial economist at Global Insight, said there needs to be signs of a more widespread economic recovery in the auto and retailing sectors before banks start lending again. He doesn't expect even a modest pick-up in GDP until the fourth quarter of this year.

"The underlying economy is still very precarious," said Bethune. "Even if housing is showing signs of a turnaround, there are several more boxes to check before we get to the point where the overall economy starts to revive."