GDP Contracts 3.8% in Q4, But Rise in Inventories Masks Real Figure

Gross domestic product (GDP) in the U.S. contracted at an annual rate of 3.8 percent in the fourth quarter of 2008, beating economists’ estimates by almost two full percentage points.

But the GDP figure released by the Commerce Department early Friday included a sharp increase in inventory as manufacturers were unable to unload their products in a weak consumer environment. Inventory increase has a positive influence on the GDP.

With the inventory increase factored out, GDP contracted at a 5.1 percent annual rate in the quarter, still better than the 5.5 percent drop expected by economists.

The 3.8 percent decrease is the largest slide in GDP since 1982. And although the National Bureau of Economic Research declared that the recession officially began in December 2007, Friday’s report marks the first consecutive quarterly contraction in GDP – the official definition of a recession – since the downturn began.

GDP contracted at a 0.5 percent annual rate in the third quarter of 2008.

Besides increasing inventory, the major economic input propping up GDP in the fourth quarter was federal government spending, which increased 5.8 percent in the quarter. Defense spending rose 2.1 percent in the fourth quarter and non-defense spending rose 14.1 percent. Cash-strapped state and local governments decreased their spending by 0.5 percent.

Consumer spending fell 3.5 percent in the quarter, with decreases of 7.1 percent in spending on services, 3.5 percent in spending on durable goods and 22.4 percent in spending on nondurable goods, the weakest in 21 years.

Business investment fell 20.1 percent in the fourth quarter, the largest drop since 1980.