- The Washington Times - Friday, January 30, 2009

UPDATED:

The U.S. economy shrank at a 3.8 percent rate at the end of last year in its biggest drop since the deep recession of 1982, the Commerce Department reported Friday morning.

The economic decline accelerated sharply in the wake of a severe financial crisis that broke out in September, sending virtually every sector plummeting at rates not seen in a generation.

Consumer spending — which usually barrels ahead in the U.S. even during recessions — fell by 3.5 percent after dropping by a similar large amount in the summer. The rare retrenchment by American consumers — the final destination for much of the goods made in the world — set off a bloodbath in sectors from manufacturing to personal services.

The rate of decline was breathtaking in some areas, with business investment in equipment and software plunging by 28 percent, housing investment nosediving by another 24 percent after more than two straight years of decline, and production of big-ticket goods falling by 22 percent.

The broad falloff in the domestic economy mirrored huge drops in economic activity in most other countries around the world, where nations have followed the lead of the U.S. into severe recessions.

“The global economy fell off a cliff in the fourth quarter,” said Richard Berner, chief economist at Morgan Stanley — the result of a global shutdown of vital credit markets that largely continues to this day.

The freefall in the economy is particularly dangerous because it is occurring simultaneously nearly everywhere, increasing the likelihood it will be self-perpetuating, economists say. It may be difficult for central banks and legislatures everywhere to break the downward momentum and get growth going again.

In the U.S., the only sectors which showed any growth were government and inventories, reflecting a largely unwanted accumulation of unsold goods at businesses after consumers shut down spending.

While the increase in government is a help to the economy that will continue and likely get bigger with enactment of a $800 stimulus package next month, the build-up of unwanted stockpiles is not helpful as businesses will have to shut down production and try to work off those inventories for several months. Already, the shut down of activities has led to widespread layoffs.

While the steep drop in the economy has given justifiable cause for alarm to consumers and political leaders alike, headlines that say the economy is in the worst shape since World War II or the Great Depression exaggerate the problem, said Edward Hadas, analyst at Breakingviews.com, a British economic think-tank.

The United States and most other countries are much wealthier than they were in those earlier eras, and can well withstand a 5 percent or 10 percent drop in output without putting most people in the poorhouse, he said.

“The economy did indeed fall off a cliff after Lehman Brothers’ bankruptcy” in mid-September, he said. “But in absolute terms, the landing was in a verdant meadow still filled with consumer comforts, health care and travel plans which would have seemed wonderful in a boom year in the 1950s.”

While unemployment has surged from less than 5 percent to 7.2 percent in the last year, “thankfully, there are no signs of anything like the widespread homelessness, hunger, misery and fear experienced during the Great Depression in the U.S,” he said.

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