WASHINGTON – The economy shrank at a 6.3 percent pace at the end of 2008, the worst showing in a quarter-century, and probably isn't doing much better now.
|Ruth Ann Slagle, left, looks over outdoor grills as she shops with sister-in-law Pat Costello to furnish her new home at a Costco store Tuesday, March 24, 2009 in Shoreline, Wash., a suburb of Seattle. [Agencies]
The Commerce Department on Thursday reported that the economy was sinking a bit faster than the 6.2 percent annualized drop for the October-December quarter estimated a month ago.
And the pain has persisted in the current quarter. New claims for unemployment benefits last week rose to a seasonally adjusted 652,000 from the previous week's revised figure of 644,000, the Labor Department said Thursday. The total number of people claiming benefits jumped to 5.56 million, higher than economists' projections of 5.48 million, and a ninth straight record-high.
The figures indicate the labor market remains weak even as some other economic indicators come in better than expected.
Consumers are cutting back under the weight of rising unemployment, falling home values and shrinking investment portfolios. Those factors have forced companies to slash production and jobs. All the negative forces are feeding on each other in a vicious cycle that has deepened the recession, now in its second year.
Economists were bracing for an even sharper 6.5 percent annualized decline in the government's third and final estimate of gross domestic product for the fourth quarter.
Still, the results were dismal. The economy started off 2008 on feeble footing, picked up a bit of speed in the spring and then contracted at an annualized rate of 0.5 percent in the third quarter.
The faster downhill slide in the final quarter came as the financial crisis - the worst since the 1930s - intensified.
The main culprit behind the GDP downgrade was that businesses' cut inventories more deeply than estimated a month ago. That shaved 0.11 percentage points off fourth-quarter GDP, rather than adding 0.16 percentage points in the previous report.
Builders also cut spending on commercial construction more deeply through previously thought.
Many analysts believe the economy will keep shrinking at least through the first six months of this year.
In the current January-March quarter, some economists believe the economy is contracting at a pace of between 5 and 6 percent. The government will release its initial estimate of first-quarter GDP in late April. GDP is the value of all goods and services produced within the US and is the best barometer of the country's economic fitness.
There were glimmers of hope on Wednesday that Americans' appetites to spend might be stirring again. Orders for costly manufactured goods and new-home sales both logged unexpected gains in February. But economists said neither result likely foreshadowed a lasting rebound.
Federal Reserve Chairman Ben Bernanke said the recession could end this year, setting the stage for a recovery next year only if shaky financial markets are stabilized.
Even in this best-case scenario, the nation's unemployment rate now at a quarter-century high of 8.1 percent, is expected to keep climbing in the months ahead. Economists predict the jobless rate could hit 10 percent at the end of this year.
More job losses were announced this week. Shaw Industries Group Inc., the world's largest carpet maker and a subsidiary of Warren Buffett's holding company Berkshire Hathaway Inc., said it would close two plants in Georgia and lay off about 600 workers. Pharmaceutical company Hospira Inc. said it would cut 1,450 jobs, or about 10 percent of its work force, while beleaguered automaker General Motors Corp. said it laid off 160 engineers, the beginning of 3,400 planned cuts among its salaried employees.
In the final quarter of last year, consumers cut spending at a 4.3 percent annualized pace, the same as previously estimated. It was the biggest decline since the second quarter of 1980. Consumers cut spending on "nondurables," such as food and clothes, at a 9.4 percent pace, the most on records dating to 1947.
Business cut spending on equipment and software by 28.1 percent on an annualized basis, the most since the first quarter of 1958.
Builder spending on commercial construction dropped an annualized 9.4 percent, the biggest decline since the third quarter of 2002. And home builders slashed spending by 22.8 percent, the most since the start of 2008.
The recession also is hurting corporate profits. One measure tied to the GDP report showed after-tax profits of US companies dropped 10.7 percent in the fourth quarter, even worse than the 0.5 percent decline logged in the third quarter. Fallout from soured investments in mortgages and other investments figured into the sharper decline.
Both the new and old fourth-quarter GDP readings were the worst since the first quarter of 1982, when the economy, hit by a severe recession, contracted at a 6.4 percent pace.
To brace the economy, the Fed has slashed a key bank lending rate to an all-time low and has embarked on a series of radical programs to inject billions of dollars into the financial system.
The Obama administration is counting on a $787 billion package of increased government spending and tax cuts, a financial-bailout program and an effort to stem home foreclosures to help turn the economy around.
For all of last year, the economy grew just 1.1 percent, unchanged from the government's previous estimate. That was down from a 2 percent gain in 2007 and marked the slowest growth since the last recession in 2001.