U.S. economy contracts at 3.8 percent pace

Well, it could have been much worse. Numbers like the early-1980s contractions of minus 5 percent and minus 7 percent were being talked about but, in the end, real economic growth in the U.S. declined at an annualized rate of just 3.8 percent during the fourth quarter of 2008. Of course, that's not the end of the story. This is the first of three estimates for economic growth during this period - the "advance" estimate - to be followed by the "preliminary" estimate next month and the "final" estimate at the end of March.

After that, the data is subject to further annual revisions.

Today's Commerce Department report showed further deterioration in both personal consumption and private domestic investment, these two contributing -2.5 percentage points and -1.8 percentage points to the overall decline as shown below. The contraction in consumer spending was the sharpest decline in the postwar era.
Government spending was a net positive during the fourth quarter, set to increase sharply in the period ahead, while net exports were about flat after a strong run earlier in the year.

While the 3.8 percent decline was not as bad as many economists expected, it would have been much worse if not for the buildup in inventories as shown below. Without this, GDP would have contracted at a 5.1 percent rate.
The sharp decline in equipment and software investment is one of the more troubling aspects of this report as it shows the extent to which parts of the economy not directly related to finance and housing are now being impacted.

The 3.8 percent rate of decline was the weakest showing for the U.S. economy since the first quarter of 1982 when real economic growth contracted at a 6.4 percent annualized rate, however, some analysts fear that the data will be revised downward sharply in the months ahead and that the current quarter may be even worse.