WASHINGTON (MarketWatch) - The U.S. economy contracted at a 3.8% annualized rate in the fourth quarter but the decline would have been worse except that the government counts an unwanted buildup of goods on store shelves as growth.
A clearer picture of the scope of the weakness in the fourth quarter, which excludes the inventory buildup, contracted at a 5.1% pace, the weakest in 28 years.
Even with inventories, the growth rate is the worst since 1982.
Today's report also confirms that the economy has entered new territory with a stunning record drop in headline inflation.
The drop in growth in the fourth quarter was above economists expectations that growth would shrink at a 5.5% annual rate.
But the data cast a negative hue over the current quarter since output is likely to be cut aggressively.
As a result, it will be a bearish report for Wall Street,
The weakness in the fourth quarter was widespread. Declines in consumer and business spending were offset by inventories and government spending. The trade sector made a small positive contribution to growth as a sharp drop in imports was larger than the decline in exports.
GDP fell just 0.5% in the third quarter.
The economy has grown just 1.3% in the past year, the weakest growth rate since 2001.
The business cycle committee of the National Bureau of Economic Research said the recession began in late 2007.
But this is the first two quarter decline in GDP.
Consumer spending fell 3.5% in the fourth quarter after a 3.8% drop in the third.
There was a sea-change in the inflation picture. The core price index (excluding food and energy) retreated to a 0.6% annual rate in the fourth quarter from 2.4% in the third, leaving the annual rate at a 2.2% gain.
But headline consumer inflation fell at a 5.5% annual rate, the biggest drop on record.
Given the drop in inflation, real disposable income rose 3.3% annualized in the fourth quarter, after falling 8.8% in the third quarter. The savings rate was 2.9% in the fourth quarter, up from 1.2% in the third.
Details
Consumer spending fell 3.5%, including a 7.1% drop in spending on services, a 3.5% drop in spending on durable goods and a 22.4% decline in spending on nondurable goods, the weakest in 21 years.
Business investment fell 20.1% in the fourth quarter, subtracting 2.3 percentage points from growth. This is the largest drop since 1980.
Investments in equipment and software dropped 27.8%, the weakest in 50 years. Investments in structures fell 19.1%, the largest decline since the first quarter of 1975.
Exports fell 19.7% in the fourth quarter, while imports, which are a subtraction from the calculation of GDP, fell 15.7%. As a result, the narrowing trade deficit added 0.09 percentage points to growth.
Government spending increased 1.9% after rising 5.8% in the third quarter. Federal spending rose 5.8%. Defense spending rose 2.1% in the fourth quarter. Non-defense spending rose 14.1%. State and local government spending fell 0.5%. Government spending contributed 0.4 percentage points to growth.
Businesses added $6.2 billion to their inventories after cutting them by $29.6 billion in the third quarter. The change in inventories added 1.32 percentage points to growth.
Residential investment fell 23.6% in the fourth quarter, and has declined each quarter for the past three years. Investment in residences subtracted 0.85 percentage points from fourth quarter growth, compared with 0.60 percentage points from third quarter growth. End of Story
Greg Robb is a senior reporter for MarketWatch in Washington.
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