GDP slides 3.8%, worst since 1982
It’s official: This recession is the worst the United States has experienced in more than 25 years, the government said Friday. And it appears likely to get worse before it gets better.
At the White House, where the new administration is working on a broad strategy to combat the crisis, President Obama described the downturn as “a continuing disaster for America’s working families.”
“The recession is deepening and the urgency of our economic crisis is growing,” Obama said as he announced the formation of a task force to address the strains on the middle class.
“But I believe if we act boldly and swiftly it can be an American moment, when we work through our differences together and overcome our divisions to face this crisis.”
In the coming weeks, the White House will unveil regulatory measures aimed at preventing future financial crises. As early as next week, it will announce rules that would bar Wall Street firms receiving bailout money from paying large bonuses to executives. The president this week termed such largess “shameful.”
The first days of Obama’s presidency have been dominated by the economy, and the latest news from the Commerce Department provided fresh evidence of trouble.
The government reported that gross domestic product -- the value of all goods and services produced in the economy -- declined at a precipitous 3.8% annualized rate in the fourth quarter of last year.
That was the steepest drop since a 6.4% decline in 1982, easily surpassing the downturns seen during the 1990-91 and 2001 recessions.
It also provided the second consecutive drop in GDP, after the 0.5% drop in the third quarter of 2008.
Two consecutive drops in GDP is generally considered proof of recession. The National Bureau of Economic Research, however, has already officially declared that the recession began at the end of 2007 based on job losses and other factors.
Before Friday’s announcement, many economists had predicted that fourth-quarter GDP would be down by 5% or more. It wasn’t, but only because of unexpected growth in inventories. That means companies are likely to cut back even further in the months to come to clear those stockpiles.
“Unfortunately, this is a head fake,” said Diane Swonk, chief economist at Mesirow Financial in Chicago. “This is still an economy that is deteriorating rapidly. That has not changed.”
Swonk and other economists who analyzed the underlying data noted that about 1.3% of the economy’s output went into inventory -- showing that companies produced more than their customers were purchasing.
Mickey Levy, chief economist at Bank of America in New York, said he had originally expected the first quarter of 2009 to improve slightly but will have to revise his forecast downward.
“All of this points towards real GDP declining faster in the first quarter than the fourth quarter,” Levy said.
Another bad portent was a sharp decline in exports. U.S. sales to other countries had been strong in recent years, boosted by high demand overseas and the relatively low value of the dollar. But that situation reversed sharply in the last three months of 2008, with exports plummeting 19.7%.
According to the International Monetary Fund, the decline in the U.S. is matched by other leading economies, which contracted about 5.5% in the fourth quarter of 2008.
“Through the third quarter, exports had been the strongest sector of the economy,” Levy said. “Now what was the strongest sector has become one of the weakest.”
The decline in GDP was caused largely by consumer belt-tightening. Consumer spending fell 3.5%, with big-ticket items like cars, furniture and appliances suffering a whopping 22.7% decline.
All together, final sales plunged 5.1% -- roughly where economists expected output to be without the inventory buildup.
“Looking out, while the first quarter will be ugly, I think the second quarter might not be that bad,” said Joel Naroff, president of Naroff Economic Advisors in Holland, Pa. “If businesses get inventories under control in the first quarter, government spending should be picking up by the second quarter.”
Naroff noted that a significant portion of the GDP decline occurred in two areas: residential construction and motor vehicles, which together took 2% out of the GDP. That suggests, he said, that if sales of homes and automobiles stabilize, they could have a powerful positive effect on U.S. output.
“There’s a lot of unsatisfied demand at this point. When you’re starting this low, it’s easy to get large levels of growth,” Naroff said. “If all you do is stabilize motor vehicles and residential construction, you add back in 2% in growth.”
The Obama administration is trying to get Congress to approve an $819-billion spending plan designed to boost the economy in the short term and promote prosperity in the long term. But public anger over what is seen as the previous administration’s mistakes and ongoing abuses on Wall Street has complicated that effort.
White House officials said Friday that Obama was working to impose stricter restrictions on companies that receive federal bailout money to prohibit hefty bonus payments to executives.
“It is very safe to assume that when a plan is outlined for financial stability that it will include and address executive compensation and bonuses,” said White House spokesman Robert Gibbs.
Obama has called it “shameful” that Wall Street firms gave their executives a reported $18 billion in bonuses at the end of 2008.
Sen. Claire McCaskill (D-Mo.) introduced a bill Friday that would bar companies getting taxpayer bailout money from paying executives more than $400,000 -- the salary earned by the president.
“Going forward, if you want taxpayers to help you survive, if you want the people at your financial institution to have a job tomorrow, then you’re going to have to limit everyone’s pay at your company to the same salary that the president of the United States makes,” McCaskill said on the floor of the Senate.
The new president announced Friday that he was creating a task force, headed by Vice President Joe Biden, devoted to raising the living standards of the middle class.
Obama sent “a very, very clear signal to everyone in this country who goes to work every day without expecting acclaim or big bonuses . . . “ ‘We’re on your side again,’ ” Biden said.