Even worse than it looks
Jan 30th 2009
From Economist.com
America's economy shrank sharply in the fourth quarter. There are few reasons for optimism
IT IS a measure of the prevailing gloom that the worst economic performance in 26 years could still be described as better than expected. Real gross domestic product fell at an annual rate of 3.8% in the fourth quarter, below the decline of 5% or more that many economists had anticipated.
However, there is precious little reason for optimism. Almost all the unexpected growth came from a small rise in business inventories. This is almost certainly because firms did not reduce production quickly enough to keep pace with slumping orders. To get inventories back in line, more production cuts in the current quarter are likely. Morgan Stanley had expected GDP to fall by 4.5% in the current quarter, but now thinks it will fall by 5.5%.
Other details are no less grim. Consumer spending sank at a 3.5% annual rate, similar to its third-quarter drop, despite a big rise in real after-tax income, thanks to the huge drop in petrol prices. Spending and incomes went in opposite directions because once-profligate consumers are now trying to save more. They put aside 2.9% of their income (after tax) in the fourth quarter, the highest rate since the beginning of 2002. They are doing so either by choice, because retirement savings have been devastated and they fear losing their jobs, or by necessity, because it has become so difficult to borrow.
Businesses are cutting back more savagely. Their investment sank by 19%, worse than any quarter in the 2001 recession which was, after all, a business investment-led slump. And that was despite some firms boosting spending to exploit a temporary tax benefit that expired at the end of the year.
(More here.)
From Economist.com
America's economy shrank sharply in the fourth quarter. There are few reasons for optimism
IT IS a measure of the prevailing gloom that the worst economic performance in 26 years could still be described as better than expected. Real gross domestic product fell at an annual rate of 3.8% in the fourth quarter, below the decline of 5% or more that many economists had anticipated.
However, there is precious little reason for optimism. Almost all the unexpected growth came from a small rise in business inventories. This is almost certainly because firms did not reduce production quickly enough to keep pace with slumping orders. To get inventories back in line, more production cuts in the current quarter are likely. Morgan Stanley had expected GDP to fall by 4.5% in the current quarter, but now thinks it will fall by 5.5%.
Other details are no less grim. Consumer spending sank at a 3.5% annual rate, similar to its third-quarter drop, despite a big rise in real after-tax income, thanks to the huge drop in petrol prices. Spending and incomes went in opposite directions because once-profligate consumers are now trying to save more. They put aside 2.9% of their income (after tax) in the fourth quarter, the highest rate since the beginning of 2002. They are doing so either by choice, because retirement savings have been devastated and they fear losing their jobs, or by necessity, because it has become so difficult to borrow.
Businesses are cutting back more savagely. Their investment sank by 19%, worse than any quarter in the 2001 recession which was, after all, a business investment-led slump. And that was despite some firms boosting spending to exploit a temporary tax benefit that expired at the end of the year.
(More here.)
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