U.S. economy shrank 3.8 percent in fourth quarter 2008

Graph showing U.S. economy contracted 3.8 percent in the fourth quarter of 2008. From The New York Times.

This is from The New York Times:

The United States economy shrank at its fastest pace in a quarter-century from October through December, the government reported on Friday, as consumer spending and business investment collapsed, signaling more economic contraction in the months ahead.

In the broadest official accounting of the toll of the credit crisis, the government reported that gross domestic product shrank at an annual rate of 3.8 percent in the fourth quarter of 2008. While that was less than economists’ expectations of a 5.5 percent drop, the decline would have been much steeper — more than 5 percent — if shipments of goods had fallen as sharply as orders.

President Obama seized on the figures Friday morning, calling the contraction a “continuing disaster” for working families, and again urged Congress to pass a package of tax cuts and spending. The House, divided on party lines, passed an $819 billion stimulus plan on Wednesday, and Senate is expected to take up the measure next week.

“What we can’t do is drag our feet or delay much longer,” Mr. Obama said. “The American people expect us to act.”

The president also announced the first meeting of a Task Force on Middle-Class Working Families, which will seek to raise living standards of working families. .

Wall Street tumbled after the numbers were released. The Dow Jones industrial average fell more than 100 points in midday trading, and the broader Standard & Poor’s 500-stock index was down 1.5 percent.

The NY Times is reporting that this difference between a 3.8 percent contraction and a possible 5.1 percent decline is due to inventory accumulation. Business have too much inventory, and they are trying to cut back even further to reduce their inventory. The Federal Reserve cannot cut interest rates to stimulate investment--the Fed's interest rates are already at zero percent, and banks are saddled with so much bad debt due to subprime mortgage speculation that they are not providing new loans to consumers and businesses even as they are accepting government bailout money. Companies are laying off workers, and those laid-off workers are cutting back on consumer spending. It is a very severe contraction that we are facing now.