GDP Drop: Not As Bad As Feared, But Worse Is Ahead

The government reported that fourth quarter GDP contracted at an annual rate of 3.8%. That does not approach the 7.8% in the second quarter of 1980 or the 10.4% post-war record set in the first quarter of 1958. The consensus estimate among analysts was for a 5.4% drop.

The fourth quarter number was helped somewhat by a build-up in inventories. Real final sales for domestic product, which excludes inventories, decreased 5.1% in the fourth quarter. This is the biggest drop since 1980. (See pictures of the 1958 recession.)

One of the concerns that economists will have to have is whether some of the effects of consumer spending and corporate investments have slipped into the current quarter. If so, that will have to be added to GDP contraction which is already almost certainly much worse than in Q4. Based on early statistics about consumer confidence, employment, real estate prices, and capital spending a GDP contraction in the range of 10% should not be a surprise.

Thirty companies laid off almost 200,00 people in January. Tens of thousand of smaller firms which the credit crisis is likely to hurt badly probably let workers go at a much more rapid pace. No one would be terribly surprised if total unemployment rose by nearly one million people in the first month of the year.

If the joblessness situation is that grim, the price of homes is likely to be falling even more sharply than last year and more mortgages are headed under water. Default and foreclose rates are bound to jump higher. Consumer confidence, which is already remarkably bad, will be exacerbated by the number of people out of work and the lack of credit to buy even the most essential items.

Jobs and consumer confidence are Siamese twins. Retail sales in the last two months of 2008 have already confirmed that. Consumer consumption likely raced downward after the holiday. Store closings and retail industry lay-offs are signs that the shoppers who did not show up in the fourth quarter are staying away now.

Because the recession has already moved to most parts of Europe and much of Asia, the demand for US exports has dropped sharply. That also undermines business output and job creation. Businesses which count on overseas consumption get the air taken out of their sales.

The fourth quarter GDP number may have been a little better than expected. Joblessness and a bleeding off of some of that overstocked inventory spell a historic drop for Q1.

—Douglas A. McIntyre

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