WASHINGTON - As bad as yesterday's grim government report on economic growth was, it points to even worse times ahead. The collapse of exports, industrial production and the inability of companies to sell their products all portend an even deeper contraction as the U.S. and global economies sink further in the weeks and months ahead.
The Commerce Department reported that the U.S. economy contracted 3.8 percent in the final three months of last year, the biggest such quarterly shrinkage in almost 27 years.
Economists had been expecting a contraction of 5.5 percent or more, but after the initial cheer yesterday, the GDP number was quickly determined to be less than advertised.
That's because business inventories - the goods that retailers couldn't sell to consumers and manufacturers - skewed yesterday's report on the nation's gross domestic product. Inventories swung from a $30 billion reduction in the third quarter of 2008 to a buildup of more than $6 billion in the final three months. Consumers were staying away, and companies couldn't get rid of goods.
"The increase in inventories means that growth in the current quarter will be worse than previously expected; probably closer to negative 5 percent. The worst of the downturn wasn't in our past, it is in our future," said Mark Zandi, chief economist for forecaster Moody's Economy.com in West Chester, Pa.
When inventories are subtracted from the equation, the contraction in U.S. economic growth was 5.1 percent, the low end of the dismal range that economists had expected. It's also the amount by which Zandi and other economists think that the U.S. economy will contract in the first three months of this year.
Behind the buildup in inventories is the American consumer, bruised and battered, retrenching for better days and on the sidelines for the foreseeable future.
"With unemployment rising and incomes weakening, we expect consumption spending will fall again in the first quarter," Gary Bigg, a Bank of America economist, said in a research note. Consumers drive about two-thirds of all U.S. economic activity.
The fourth-quarter decline in the GDP follows a 0.5 percent contraction in the third quarter of 2008. The National Bureau of Economic Research said the U.S. economy entered a recession in December 2007.
Presuming that it lasts beyond May, which virtually all economists now expect, this recession will be the longest and perhaps deepest period of economic decline in the United States since the Depression.
In a statement, the chairwoman of the White House Council of Economic Advisers, Christina Romer, said that yesterday's numbers indicated clearly that the U.S. recession was worsening.
"The large decline confirms the evidence from other indicators, such as payroll employment and the unemployment rate, that the U.S. economy continues to contract severely," she said. "Aggressive, well-designed fiscal stimulus is critical to reversing this severe decline and putting the economy on the road to recovery and improved long-run growth."
The House of Representatives has passed an economic stimulus bill, which includes spending provisions and tax cuts that would cost the taxpayers more than $819 billion. The Senate will begin voting on its version next week. Congressional leaders in both parties have promised to send a stimulus bill to President Barack Obama by mid-February.
Another sign of further trouble in the GDP data:
"The decline in motor vehicle output was particularly severe, accounting for 2 percentage points of the overall fall in GDP of 3.8 percent. This widespread decline emphasizes that the problems that began in our housing and financial sector have spread to nearly all areas of the economy," Romer said. "Immediate action to support both the financial sector and overall demand is essential."