The U.S. economy shrank at its fastest pace in nearly 27 years in the fourth quarter, government data showed on Friday, sinking deeper into recession as consumers and business cut spending.
In a report that showed a broad-based contraction nearly across all sectors, the Commerce Department said gross domestic product, which measures total goods and services output within U.S. borders, plummeted at a 3.8 percent annual rate.
That was the biggest drop since the first quarter of 1982, when output contracted 6.4 percent, and highlighted that the housing-led recession, which started in December 2007, was gathering momentum.
These were the first consecutive declines in GDP since the fourth quarter of 1990 and the first three months of 1991.
INVENTORIES HIGHER
Analysts polled by Reuters had forecast GDP contracting 5.4 percent in the fourth quarter after a 0.5 percent drop in the third quarter. They said the depth of the economic decline in the fourth quarter could have been masked by the $6.2 billion build up in inventories.
"I think the numbers are weaker than the better-than-expected headline reading suggests because the miss was mainly in what could have been an involuntary increase in inventories," said Dana Saporta, analyst at Dresdner Kleinwort in New York.
"Because inventories rose in the fourth quarter we're expecting a bigger drop than otherwise in the first quarter of 2009 — a bigger drop in inventories and probably a bigger drop in GDP than otherwise."
U.S. equity index futures reversed losses to trade higher after smaller-than-expected contraction in GDP. U.S. Treasury debt prices pared gains, while the dollar pared gains against the euro.
For 2008, GDP rose 1.3 percent, the slowest pace of growth since 2001, when the economy expanded 0.8 percent.
The advance report from the Commerce Department showed consumer spending, which accounts for two-thirds of U.S. economic activity, fell 3.5 percent in the fourth quarter after declining 3.8 percent in the third quarter.
It was also the first consecutive drops since the last quarter of 1990 and the first quarter of 1991.
Spending on durable goods like cars and furniture plunged 22.4 percent, the steepest decline since the first quarter of 1987.
Falling house prices, coupled with the stock market collapse and tight access to credit, have hit consumer spending.
In response to the slump in demand, investment by business slumped 19.1 percent for the sharpest pull-back since the first quarter of 1975. Residential investment plummeted 23.6 percent.
Exports of goods and services plunged 19.7 percent, the biggest drop since the third quarter of 1974.
The sharp economic downturn is putting a lid on inflation pressures, with the personal consumption expenditures price index plunging a record 5.5 percent after rising 5 percent in the third quarter.
Excluding volatile food and energy items, core prices grew at a muted 0.6 percent, the slowest rate since the fourth quarter of 1962. Core PCE rose 2.4 percent in the third quarter.
Analysts polled by Reuters had forecast the PCE index falling 5.4 percent.
WEAK WAGES
Separately, the weak jobs market pinched wages and benefits, with the Labor Department's Employment Cost Index rising just 2.6 percent last year, the slowest rise since records began in 1982.
Employment costs in the fourth quarter increased by 0.5 percent, less than the 0.7 percent rate forecast by economists, as both wage and benefit growth slowed.
