The U.S. economy in the fourth quarter of 2008 turned in its worst performance in a quarter century. The Bureau of Economic Analysis reported this morning that the economy shrank by an estimated annual rate of 3.8 percent in the fourth quarter of 2008, the largest drop since the first quarter of 1982. For all of 2008, total economic growth consequently registered a mere 1.3 percent, the lowest average annual growth rate since 2001.
The sharp downturn at the end of 2008 is unlike anything that we have seen in terms of negative economic performance since at least the early 1980s. And more bad news may be coming in 2009. All sectors of the economy—except for the government—contributed to the drop in economic activity in the fourth quarter. Personal consumption spending, investment by businesses and households, and exports all showed large drops. Even government spending registered a meager performance due to a small decline in spending by state and local governments suffering through a budget crunch.
As bad as the fourth quarter was, the economy in early 2009 could look even worse. Consumer spending could drop further as hundreds of thousands of workers are losing their jobs each month, business investment spending—especially on commercial buildings—continues to fall, exports could take another hit as many parts of the world are beginning to enter their own recessions, and state and local governments may curtail their consumption and investment spending as their budgets are decimated by the recession.
Against this bleak outlook, it should be clear that only federal government spending, especially when delivered quickly and efficiently, can provide the growth that is desperately needed to stop the economy and the labor market from its accelerated slide. Clearly passage of an economic stimulus and recovery legislation now working its way through Congress is of paramount importance.
Consider these key economic indicators. Seasonally adjusted personal consumption spending, by far the largest part of the economy, fell by 3.5 percent in the fourth quarter, after dropping 3.8 percent in the third quarter of 2008. American consumers have tapped out their spending, especially since job losses sharply accelerated toward the end of 2008. The last two quarterly declines exceeded all previous declines since the second quarter of 1980. Also, the drop in consumer spending on durables, such as cars, contributed 45.0 percent of the decrease in growth in the fourth quarter of 2008, and the decline in nondurable good spending, such as food and textile, contributed another 39.2 percent. Without a resurgent consumer fuelled by job and wage gains, the U.S. economy is looking at some dire months ahead.
The spending by households on their homes did not fare much better. In the fourth quarter of 2008, residential real estate spending fell by 23.6 percent, the twelfth decrease in this sector in a row. For all of 2008, this part of the economy shrank by 20.8 percent, the largest annual decline since 1980, meaning that the losses in residential real estate have accelerated over the past three years.
Investment spending by companies—usually thought of as the main force that could drive the economy out of the recession—again sharply fell in the fourth quarter of 2008, likely as a result of the credit crunch. Business spending on factories, office buildings, machinery, computers, software, and other investment items dropped by 19.1 percent in the fourth quarter of 2008. This is the largest such decrease since the first quarter of 1975.
The drop in business investment spending was largely a result of substantially less spending on equipment and software. In the fourth quarter, spending on these items fell by an astounding 27.8 percent, its largest decline in more than 50 years—since the first quarter of 1958, to be exact. As the credit crunch persisted, it is likely that many commercial construction projects are now suffering from a shortage of capital and could further crimp economic growth in 2009, yet these projects still held relatively steady with a decrease of only 1.8 percent in the fourth quarter of 2008.
Furthermore, exports had been holding up at least part of the economy before declining sharply in the fourth quarter of 2008. But as the recession ensnarled other parts of the globe, U.S. exports took a hit, too. Exports of goods and services dropped by 19.7 percent in the fourth quarter of 2008, their first decline since the second quarter of 2003 and the largest decrease since the third quarter of 1974.
At the same time, imports also dropped as U.S. consumers ran out of steam and oil prices fell, which meant that total trade neither contributed to nor distracted from economic growth in the fourth quarter of 2008. Imports dropped by 15.7 percent, making this the fifth decline in imports in a row. The decline in imports offset the negative impact of falling exports on economic growth, so that total trade actually slowed the total drop in growth by 2.4 percent.
The government sector was the only part of the economy that showed some increase. Total government spending expanded by 1.9 percent in the fourth quarter. State and local government spending, though, fell by 0.5 percent, offsetting the 5.8 percent gain in federal spending. As states and municipalities struggle to cope with a deepening budget crunch, government spending overall could also fall in the coming months.
Finally, overall inflation-adjusted economic growth received a boost due to falling prices. All prices fell by 0.1 percent in the fourth quarter of 2008, which meant that inflation did not distract from economic growth. This is a feat that is hopefully not repeated in the coming months since it would mean that the U.S. economy is experiencing a detrimental deflationary spiral that could put an additional damper on economic growth.
The economic growth figures show that the economy’s performance at the end of 2008 was the worst in about three decades. All sectors of the economy are under siege and only quick, large, and well-targeted government intervention can help turn the economy and the labor market around.
Christian E. Weller is a Senior Fellow at the Center for American Progress and Associate Professor at the Department of Public Policy and Public Affairs at the University of Massachusetts Boston.