U.S. 4Q GDP Decline Remains Sharpest Since Early 1980s As Profits Crater

The U.S. Bureau of Economic Analysis indicated that its revised estimate of 4Q '08 was little changed. The 6.3% (AR) decline compared to the preliminary estimate of a 6.2% drop. Nevertheless, the decline was the steepest since 1982 and it approached the 7.8% quarterly decline during the "credit crunch" recession of 1980. Consensus expectations had been for a deepening of the 4Q decline to 6.6%. Accompanying the GDP report was the first look at 4Q corporate profits. They fell 16.5% (-21.5% y/y) and the decline was just short of the record 17.0% drop logged during the recession of 1953. A record 59.3% drop (-66.9% y/y) in financial sector earnings led the downturn as the real estate industry imploded. Economic recession further reduced nonfinancial sector earnings by 10.7% (-8.9% y/y) before costs were brought fully under control. That decline came despite the halving of crude oil prices and was the worst quarterly drop since early 1981. Foreign sector earnings held together and rose 4.6% during 4Q but they were off 6.0% versus the year prior. Revisions to the GDP components were fairly minor. Offsetting one another were downward revisions to inventories' negative contribution to GDP growth and an upward revision to foreign trade. Nevertheless, the negative contribution from trade to U.S. growth was the first since 1Q '07. Exports fell at a 23.6% rate (-1.8% y/y) as recessions abroad intensified. U.S. imports fell at a 17.5% rate (-7.5% y/y) with the developing U.S. recession. Real U.S. final sales to domestic purchasers contracted at a 5.8% annual rate and that was the worst decline since the 1980 recession when consumers pocketed their credit cards. Personal consumption expenditures fell an unrevised 4.3% (-1.5% y/y) as spending on motor vehicles declined at a huge 38.0% annual rate. Business fixed investment fell at a 21.7% rate (-5.2% y/y) and residential investment dropped at a 22.8% rate (-19.4% y/y).

The government sector contributed marginally to GDP growth last quarter. Activity rose at a 1.3% annual rate (3.2% y/y) led by a 6.9% (8.2% y/y) rise in Federal spending.

The estimate of price inflation was unrevised. The 0.5% increase in the GDP chain price index remained greatly reduced from the 3.9% advance during 3Q. The PCE price index fell at a 4.9% annual rate as gasoline prices fell. The residential investment chain price index fell at a 9.4% annual rate while the business fixed investment price index rose 4.6%.

The U.S. National Income & Product Account data is available in Haver's USECON and the USNA databases.

Sources of the Great Moderation: shocks, friction, or monetary policy? from the Federal Reserve Bank of San Francisco is available here.

Chained 2000$, % AR	4Q '08 (Final)	4Q '08 (Preliminary)	4Q '08 (Advance)	3Q '08	4Q Y/Y	2008	2007	2006
GDP	-6.3	-6.2	-3.8	-0.5	-0.8	1.1	2.0	2.8
Inventory Effect	-0.1	0.2	1.3	0.8	0.1	0.1	-0.4	0.0
Final Sales	-6.2	-6.4	-5.1	-1.3	-0.7	1.4	2.4	2.8
Foreign Trade Effect	-0.2	-0.5	0.1	1.1	1.4	1.4	0.6	0.2
Domestic Final Demand	-5.8	-5.7	-4.9	-2.2	-1.7	-0.0	1.8	2.6
Chained GDP Price Index	0.5	0.5	-0.1	3.9	2.0	2.2	2.7	3.2