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US economy suffers worst decline in 26 years

world Updated: Feb 27, 2009 23:20 IST
Arun Kumar

The US economy contracted at its sharpest during the last three months of 2008 with the GDP suffering its worst decline in 26 years, according to revised government data released on Friday.

GDP, which measures the output of goods and services produced in the US, fell at an annual rate of 6.2 per cent in the fourth quarter, adjusted for inflation, as exports plunged and consumers cut spending by the most in more than 28 years.

According to a preliminary report from the Bureau of Economic Analysis (BEA), the decline was worse than the 3.8 per cent drop it reported in last month's "advance" reading on fourth-quarter GDP. It was the largest drop in GDP since the first quarter of 1982, when the economy suffered a 6.4 per cent decline.

The reading was also much worse than the 5.4 per cent decline economists surveyed had expected.

After a 0.5 per cent decline in the third quarter, a 6.2 per cent contraction reflects how severe the economic downturn was at the end of last year, and highlights concerns about the economy going forward.

GDP is expected to shrink another five percent in the first quarter before recovering in the second half of the year, according to Moody's

Among the main drivers of the decline was a 4.3 per cent drop in consumer spending, which makes up two-thirds of the nation's overall economic activity.

As consumers cut back on spending amid rising unemployment, businesses have reduced their inventories to compensate for falling revenues.

Businesses trimmed inventories by nearly $20 billion in the fourth quarter, after cutting $29.6 billion in the previous quarter. Spending on equipment and software fell at a 29 per cent annual rate, reflecting decreased spending by businesses.

A big drop in exports also contributed to the decline, while an increase in government spending helped offset some of those declines.

Exports plummeted at a 23.6 per cent annual rate in the fourth quarter, versus an increase of 0.3 percent in the previous quarter.

Earlier in 2008, robust demand for US exports helped keep GDP in positive territory. But that demand has evaporated as the global economy continues to deteriorate.

The BEA will report its final reading on fourth-quarter GDP on March 26.