U.S. Recession Intensifies; 3.8% Drop in Real GDP Is Sharpest Since 1982

The current recession in economic activity intensified last quarter. Real GDP contracted at a 3.8% annual rate. Although, the rate of decline was less than the generally expected 5.4%, it was the deepest quarterly drop since the last, sharp recession of 1982. Moreover, a run-up in inventories accounted for the upside surprise to growth and that will have limited staying power if demand remains under pressure. Real U.S. final sales to domestic purchasers contracted at a 4.9% annual rate after the 2.2% 3Q drop. That was the worst decline since the notably sharp, "credit crunch" recession of 1980 when consumers pocketed their credit cards. Personal consumption expenditures fell a sharp 3.5% (AR) after a like decline during 3Q. Business fixed investment fell off a cliff at a 19.1% annual rate. Residential investment fell at a 23.6% rate. Combined, business plus residential investment declined for the tenth quarter out of the last eleven. The sharpness of that decline in demand suggests that the strong rate of 4Q inventory accumulation was involuntary. Inventory accumulation added 1.3 percentage points to GDP growth which was the most for one quarter since 2005. The increase then was followed by three consecutive quarters of decumulation or modest accumulation as tight control methods kept inventories under wraps.

An improved foreign trade deficit added just 0.1 percentage points to 4Q GDP growth, held down by an outsized 19.8% decline in exports. Imports fell at a 15.7% rate with the developing domestic recession.

The estimate of the GDP chain price index fell by 0.1% (AR), the first quarterly decline since 1954. It was a give-back from the a strong 3.9% gain during 3Q. The 4Q drop was led by lower oil prices which pulled down the PCE deflator at a 5.5% annual rate, reversing all of the 3Q increase. The residential investment chain price index fell at an 8.2% annual rate but the business fixed investment price index rose 5.0%, about as it did during 3Q.

Chained 2000$, % AR	4Q '08 (Advance)	3Q '08	4Q Y/Y	2008	2007	2006
GDP	-3.8	-0.5	-0.2	1.3	2.0	2.8
Inventory Effect	1.3	0.8	0.1	0.1	-0.4	0.0
Final Sales	-5.1	-1.3	-0.3	1.4	2.4	2.8
Foreign Trade Effect	0.1	1.1	1.4	1.4	0.6	0.2
Domestic Final Demand	-4.9	-2.2	-1.5	0.0	1.8	2.6
Chained GDP Price Index	-0.1	3.9	1.9	2.2	2.7	3.2