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Topsy-turvy: US economy contracts 3.8%, below forecast

Friday, January 30th 2009 - 20:00 UTC
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The US economy shrank at an annual rate of 3.8% in the last quarter of 2008, according to the latest report from the US Commerce Department. This is the worst performance of the US economy since 1982.

The report released Friday corresponds to the October-December period that immediately followed the collapse of investment bank Lehman Brothers, a key moment in the financial crisis that sent shock waves around the world. "We're seeing across-the-board capitulation here. The only sectors of the economy that are continuing to grow are education and health care," says Professor Peter Morici of the University of Maryland. "This is the worst recession since World War II, and the real question remains if it's a recession or a depression -- not a Great Depression, we're not talking about 1929 -- but the hallmark of the three depressions we have had is that they're long, extended contractions [where] the economy doesn't have the capacity to recover under its own energy," Morici says. Whatever the definition, evidence of recession in the US is all around. Homebuilders are reeling from the collapse of the housing market. Companies hit hard by the credit crisis are cutting production and shedding jobs. More than 2 million jobs were lost last year and this week alone has seen major companies like Ford, Caterpillar, Boeing, Kodak, Texas Instruments, Starbucks announce tens of thousands more layoffs. Housing foreclosures, job cuts, no easy access to credit, has become a deadly cocktail for consumer spending, the largest part of the US economy. "The demand just isn't there, and there's incredible fear," said Honeywell CEO David Cote, as he and other business chiefs met US President Barack Obama on January 28th. "Everybody's just so concerned about what's going to happen next that things are just locking up, and we need to do something to break that lockup. You see companies doing all the things that they would do when they start to see demand fall, sales fall -- hiring stops, layoffs begin, and expenses get cut everywhere -- a bad dynamic for all of us, and all stemming from that lower demand," Cote said. Economists expect the first quarter of this year will see a similar contraction. And growth, when it returns -- perhaps later this year, perhaps next -- is likely to be weak. However the bright side is that the figures were slightly better than expected. The 3.8% percent annual pace of contraction in the final three months of last year was less than forecast with a build up of unsold goods cushioning the blow. Without the jump in inventories, the decline would have been 5.1%, the Commerce Department said in Washington.

Categories: Economy, United States.

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