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The Smoking Man
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« on: January 31, 2009, 02:47:48 PM » |
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Steep Slide in U.S. Economy as Unsold Goods Pile Up
By LOUIS UCHITELLE
The economy shrank at an accelerating pace late last year, the government reported on Friday, adding to the urgency of a stimulus package capable of bringing the country back from a recession that appears to be deepening.
The actual decline in the gross domestic product — at a 3.8 percent annual rate — fell short of the 5 to 6 percent that most economists had expected for the fourth quarter. But that was because consumption collapsed so quickly that goods piled up in inventory, unsold but counted as part of the nation’s output.
“The drop in spending was so fast, so rapid, that production could not be cut fast enough,” said Nigel Gault, chief domestic economist at IHS Global Insight. “That is happening now, and the contraction in the current quarter, as a result, will probably exceed 5 percent.”
The dismal fourth quarter, and the likelihood of more of the same through the spring, are fueling discussion among policy makers and politicians over the best way to spend the soon-to-be-authorized federal money.
Some caution that President Obama’s proposals try to achieve too many objectives — for example, broader health care coverage and energy efficiency — at the expense of focusing tax dollars on the core issue of job creation. By this argument, more should be spent on things like infrastructure repair, either directly or by channeling money to the states for projects now delayed for lack of adequate tax revenue.
Others argue that the best bang for the buck would come from a stimulus package devoted mainly to tax cuts rather than public investment. The breakdown in the $819 billion bill that the House approved on Wednesday and the Senate will take up next week is two-thirds spending, one-third tax cuts.
The president took a different approach in a press conference on Friday. Seizing on the damaging fourth-quarter figures and the prospect of an even weaker first quarter, he called the contraction “a continuing disaster” for working families and pushed Congress to act quickly to provide relief.
Even with the help of swelling inventories, the 3.8 percent contraction, adjusted for inflation and representing all of the nation’s economic activity, was the largest quarterly drop in the nation’s output since the 1982 recession.
Business investment, commercial construction, home building and exports all fell steeply, most of them doing so for the first time since the recession began 13 months ago. Data released this week suggested that the decline had continued. As for consumer spending, in only one other quarter since records were first kept in 1947 have final sales of goods and services produced in America fallen so much.
“Consumer spending is often held up as the engine of growth, and we are now experiencing the second-largest contraction on record,” said Ben Herzon, an economist at Macroeconomic Advisers in St. Louis, referring to the 7.6 percent drop in spending in the midst of the 1974-75 recession, and 5.1 percent now.
Christina D. Romer, chairwoman of the president’s Council of Economic Advisers, said in a statement that “aggressive, well-designed fiscal stimulus is critical to reversing this severe decline.” She did not describe the elements of a well-designed fiscal stimulus, but the vast majority of the nation’s economists agree that one is necessary, and soon.
Virtually none dispute that the usual route to recovery, cheap credit, has failed to work this time — not when lenders are pulling back, despite prodding from the Federal Reserve, and borrowers are focused more on paying down debt and building up savings.
“I’m hoping the fiscal stimulus will be a catalyst to reignite the private sector,” said Stuart Hoffman, chief economist at the PNC Bank Corporation in Pittsburgh. “My hope is that as the fiscal stimulus kicks in, people will begin to spend and invest more, modestly anyway, in the second half of the year.”
Absent a large stimulus package, most economists expect the nation’s output to shrink not only in the first half of the year, but in the second half as well. In April, the recession would become the longest since the 1930s. Until now, the record, 16 months, was shared by the severe recessions of 1974-75 and 1981-82. This one began in December 2007 as employment peaked and began to fall.
“We are in the thick of it now,” said Robert Barbera, chief economist for ITG Investment Technology Group.
The Federal Reserve ended the mid-’70s and early ’80s recessions by cutting interest rates sharply to encourage borrowing and spending in the private sector. This time, the credit crisis, rising unemployment, plunging home prices and bank failures have disrupted that mechanism, particularly since late summer.
Indeed, until the fourth quarter, the nation’s output had declined only in the third quarter, falling by half a percent at an annual rate. The Fed, in response to the accelerating decline, cut rates to nearly zero — a tactic that in the past would have raised cries of loose money and rising inflation.
The concern now, however, is deflation, or falling prices, and Friday’s report from the Bureau of Economic Analysis suggested that the fear had some justification. Personal consumption expenditures, not counting food and energy, rose at an annual rate of only 1.6 percent, the smallest quarterly increase in years. If prices were to actually fall, consumers might respond by putting off purchases until prices were even lower.
“My sense is that business is slashing hugely and across the board,” said Allen Sinai, president and chief global economist of Decision Economics. “Everyone is cutting prices, people, capital spending and all kinds of expenses. It is almost a herd instinct.”
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