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US economy likely shrank at fastest pace since 1982

(Agencies)
Updated: 2009-01-30 15:22

WASHINGTON -- The country tumbled deeper into recession and probably logged its worst economic performance in a quarter-century during the final three months of last year as battered consumers and businesses throttled back spending.

The US economy is deteriorating at an alarming clip as the housing, credit and financial crises -- the worst since the 1930s -- feed on each other in a vicious cycle that has proven difficult for Washington policymakers to break.

A new home construction sits quiet in Dellville, Pa., Thursday, Jan. 29, 2009. Sales of new homes plunged to the slowest pace on record last month as the hobbled homebuilding industry posted its worst annual sales results in more than two decades. [Agencies]

The Commerce Department is set to release a report Friday expected to show the economy shrank at a pace of 5.4 percent in the October-December period, a much faster descent than the 0.5 percent decline logged in the prior quarter. If economists' forecasts are correct, it would mark the weakest quarterly showing since an annualized drop of 6.4 percent in the first quarter of 1982, when the country was suffering through a severe recession.

"It was a bloodbath," said Richard Yamarone, economist at Argus Research, referring to the economy's fourth-quarter performance.

A massive pullback by consumers is expected to play a prominent role in the economy's worsening backslide. They are cutting back on spending as jobs disappear and major investments -- homes, stocks, retirement accounts -- tank in value. Businesses are retrenching, too, as profits shrivel and demand wanes from customers in the US and overseas.

"Households and businesses were bombarded by all the fallout," Yamarone said.

Many economists think the fourth quarter will turn out to be the worst quarter for the recession, which is now in its second year. But the economy will stay very weak in the months ahead. Analysts believe the economy is contracting in the current quarter at a pace of 4 percent or more.

"Let's brace ourselves for the cold blast," said Brian Bethune, economist at IHS Global Insight.

To jolt life back into the economy, President Barack Obama and Congress are racing to enact a multibillion-dollar package of increased government spending that includes big public works projects and tax cuts. The House passed a US$819 billion package on Wednesday and the bill is working its way through the Senate. Economists say the money needs to be quickly pumped into the economy to help stop the free-fall.

Looking ahead to Friday's report, White House press secretary Robert Gibbs said Thursday: "We're likely to get a number for economic growth for the fourth quarter that's fairly staggering."

The report tallies gross domestic product, the value of all goods and services produced within the United States. It is considered the broadest barometer of the country's economic health.

The economy plunged deeper into recession despite a US$700 billion financial bailout program run by the Treasury Department and a slew of radical programs by the Federal Reserve and others designed to bust through a debilitating credit clog and get banks to lend more freely. The Fed last month slashed a key interest rate to a record low, and on Wednesday signaled that it would use other unconventional tools to turn the economy around.

In the fourth quarter, analysts predict that sales of big-ticket or "durable" goods, such as cars, appliances and other manufactured products will be especially hard hit as many consumers retrenched and would-be buyers were unable to secure financing.

Big cutbacks by homebuilders -- reeling from the collapsed housing market -- and other companies also will figure into the fourth quarter's weakness. Trying to survive the downturn, businesses are scrambling to cut costs and that's taking a painful toll on the nation's labor market.

The unemployment rate jumped to a 16-year high of 7.2 percent in December and could hit 10 percent or higher at the end of this year or early next year. A staggering 2.6 million jobs were lost last year, the most since 1945, though the labor force has grown significantly since then. Another 2 million or more jobs will vanish this year, economists predict.

This week alone, tens of thousands of new layoffs were announced by companies including Ford Motor Co., Eastman Kodak Co., Black & Decker Corp., Boeing Co., Pfizer Inc., Caterpillar Inc., Home Depot Inc. and Target Corp.