Economy shrinks 3.8 %

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AP

* Friday January 30, 2009, 8:56 am EST

WASHINGTON (AP) -- The economy shrank at a 3.8 percent pace at the end of 2008, the worst showing in a quarter-century, as the deepening recession forced consumers and businesses to throttle back spending.

Although the initial result was better than economists expected, the figure is likely to be revised even lower in the months ahead and some believe the economy is contracting in the current quarter at an even faster pace.

The new figure, released Friday by the Commerce Department, showed the economy sinking at a much faster clip in the October-December period than the 0.5 percent decline logged in prior quarter.

Although economists expected an even worse fourth-quarter performance -- a staggering 5.4 percent rate of decline -- the results were still grim.

The report provided clear evidence of the economy's rapid deterioration as the housing, credit and financial crises -- the worst since the 1930s -- feed on each other. It's a vicious cycle that has proven difficult for Washington policymakers to break.

The 3.8 percent annualized drop marked the weakest quarterly showing since a 6.4 percent annualized plunge in the first quarter of 1982, when the country was suffering through a severe recession.

For all of 2008, the economy grew by just 1.3 percent. That was down from a 2 percent gain in 2007 and marked the slowest growth since the last recession in 2001.

To jolt life back into the economy, President Barack Obama and Congress are racing to enact a multibillion-dollar package of increased government spending that includes big public works projects and tax cuts. The House passed a $819 billion package on Wednesday and the bill is working its way through the Senate. Economists say the money needs to be quickly pumped into the economy to help stop the free-fall.

The White House was bracing for bad news. On the eve of the report's release, press secretary Robert Gibbs thought the fourth-quarter results would be "fairly staggering."

The report tallies gross domestic product, the value of all goods and services produced within the United States. It is considered the broadest barometer of the country's economic health.

The fourth quarter was by far the weakest three-month period in 2008, and the 3.8 percent figure is likely to be revised even lower as the government makes new estimates based on more complete data. The economy will stay very weak for much of this year, analysts predict. Some believe the economy is contracting in the current quarter at a pace of 4 percent or more.

A massive pullback by consumers is expected to play a prominent role in the economy's worsening backslide. They are cutting back on spending as jobs disappear and major investments -- homes, stocks, retirement accounts -- tank in value. Businesses are retrenching, too, as profits shrivel and demand wanes from customers in the U.S. and overseas.

Battered consumers slashed spending at a 3.5 percent pace at the end of 2008, following a bigger 3.8 percent annualized cutback in the third quarter. The last time consumers chopped spending for two straight quarters was in the closing quarter of 1990 and the opening quarter of 1991.

In the fourth quarter of 2008, Americans cut back spending especially hard on big-ticket "durable" goods, including cars, appliances and furniture. Spending on durables plunged at rate of 22.4 percent, the most since early 1987.

A 7.1 percent annualized cutback in spending on "nondurables," such as food and clothing was the deepest since the end of 1950.

Americans newfound frugality was clearly visible. The savings rate rose to 2.9 percent in the fourth quarter. That was up from 1.2 percent in the third quarter and matched the rate in early 2002 when the country was still struggling to get back to full economic health after the 2001 recession.

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