- The Washington Times - Saturday, February 28, 2009

The U.S. economy surprised the experts, contracting much more severely during the fourth quarter of last year than the government first reported in January.

Economic output plummeted at a 6.2 percent annual rate during the October-December period, the steepest quarterly decline in more than a quarter century, the Commerce Department reported Friday.

Initially, the fourth-quarter downturn was put at 3.8 percent. But that “advance” estimate was based on incomplete data, and government economists had to make projections.

“Typically, those experts have a good-enough grasp of economic conditions to be off an average of a half percentage point between the ‘advance’ and ‘preliminary’ numbers. Not this time,” said Bernard Baumohl, chief global economist for the Economic Outlook Group.

“That 2.4 percentage-point revision was nearly five times the average correction,” he said.

Private economists also missed the mark by wide margins, although most estimates last month projected a decline of about 5 percent. “We’re not aware of anyone saying [the economy] would fall in excess of 6 percent,” Mr. Baumohl said.

He attributed the huge revision to missing the mark on the change in business inventories, consumer spending and exports and imports. Foreign trade, for example, was first reported to have added nine-tenths of a percentage point to gross domestic product (GDP); more complete data later revealed that the foreign sector actually reduced GDP by nearly half a point last quarter.

Friday’s “preliminary” numbers will undergo several additional revisions before they are finalized in about 3 1/2 years.

The near-term outlook is just as bleak as last quarter’s dreadful numbers.

“All the incoming data suggest that the economy is set to contract at a rapid rate through the first half of 2009, before stabilizing in the second half,” said Nariman Behravesh, chief economist of IHS Global Insight.

Friday’s report shocked economists, who already were expecting a downward revision from last month’s estimates, but not nearly as steep as it proved to be.

As the crisis in the financial markets throttled the U.S. and world economies throughout the fourth quarter, spending in the United States plunged in most sectors. Lending tightened considerably after credit markets around the world froze up following the September bankruptcy of Lehman Brothers investment bank.

Consumer outlays, which account for about 70 percent of gross domestic product (GDP), fell 4.3 percent last quarter, much more than first reported. It was the biggest drop in consumption since credit controls sapped consumer spending during the second quarter of 1980.

Even during the deep downturn of 1981-82, when the unemployment rate peaked at 10.8 percent, consumer spending never fell by more than 3 percent in any quarter. In fact, consumer spending never declined at all during the 2001 recession.

Especially hard hit last quarter were autos, appliances and other long-lasting goods whose purchase consumers could delay.

Households tightened their purse strings as they saw their net worth plummet last year. The Standard & Poor’s 500-stock index and the Nasdaq composite both lost about 40 percent of their value in 2008. And home prices plunged more than 18 percent, according to the S&P/Case-Shiller national home price index.

Meanwhile, the private sector shed more than three million jobs last year.

Business investment plunged at a 21.1 percent annual rate last quarter, the biggest drop since 1975. Businesses purchased nearly 30 percent less equipment and software than they bought the previous quarter.

Exports, which had been keeping the economy above water for several quarters, fell off a cliff late last year, plunging 23.6 percent. Merchandise exports were down more than a third. With America’s trading partners also experiencing deep downturns, vibrant export markets will not likely return soon.

“The data so far this year suggest another quarter of deep contraction, and we now expect that GDP will fall at a 5 percent annualized pace this quarter,” said Aaron Smith, a senior economist at Moody’s Economy.com.

“The economy should stabilize around midyear, but this outcome depends on aggressive fiscal and monetary action, including financial and housing rescue programs, to support household demand even as businesses reduce investment and payrolls,” Mr. Smith said. “The jury is still out on whether this will prove correct.”

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