Friday February 27, 04:47 PM
US economy shrinks 6.2 pct in deepening recession
By Veronica Smith
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WASHINGTON (AFP) - The US economy shrank at a 6.2 percent annual pace in the fourth quarter, government data showed Friday highlighting the stunning meltdown in activity late last year.
The gross domestic product (GDP) reading was far worse than the 5.4 percent rate expected by most analysts and underscored the challenges facing President Barack Obama's efforts to end the most severe economic crisis since the Great Depression.
"We are in the midst of the worst economic storm of the last half century -- and it keeps getting worse," said Nariman Behravesh, chief economist at IHS Global Insight.
The contraction was the sharpest since the first quarter of 1982, the Commerce Department data showed, and came as the world's largest economy was winding up a full year of recession.
The department's second revision marked a whopping 2.4 percentage point change from the 3.8 initial estimate for the October-December period. The economy had contracted 0.5 percent in the third quarter.
Since taking office last month, Obama has injected a 787-billion-dollar stimulus into the moribund economy and on Thursday unveiled an unprecedented 3.55-trillion-dollar budget plan that shifts government spending into high gear.
News of the sharper-than-expected contraction in the 2008 fourth quarter added to the jitters over how long and deep the recession will last, and doubts about the government's ability to get the economy back on track.
The Commerce Department said the revisions were broadbased but mainly led by three pillars of the economy: consumer spending, which drives two-thirds of activity; exports; and inventory investment.
Bucking up the economy was federal government spending and investment, which rose 6.7 percent in the fourth quarter after a 13.8 percent rise in the third.
US exports of goods and services plunged 23.6 percent in the October-December period after an increase of 3.0 percent in the third quarter.
The sharp contraction was partially offset by a 16.0 percent decrease in imports, accelerating the 3.5 percent decline in the prior quarter as consumers and businesses sharply curbed spending amid rising unemployment, tight credit and turbulence on financial markets.
Consumer spending dropped 4.3 percent despite deeply discounted year-end holiday sales, building on a decrease of 3.8 percent in the third quarter.
Spending on equipment and software fell off a cliff, down 28.8 percent from a 7.5 percent drop in the prior quarter.
Prices in the fourth-quarter fell 4.1 percent after climbing 4.5 percent in the third quarter. Core (Berlin: LJ1.BE - news) inflation, excluding volatile food and energy prices, slowed to a 1.1 percent rate from 2.8 percent in the prior quarter.
Private businesses pared back inventories more deeply than previously estimated, by 19.9 billion dollars.
"The decrease in inventories brings a positive note to the report," said Natixis (Paris: FR0000120685 - news) analyst Elsa Dargent.
For the full year of 2008, the economy grew at a modest 1.1 percent annualized rate, the weakest pace since 2001, the data showed. In 2007, GDP rose at a 2.0 percent rate.
Inflation rose 3.3 percent in 2008 while the core PCE index was up 2.2 percent.
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