The Economic Free Fall Is Losing Momentum
The contraction in real gross domestic product (GDP) for the fourth quarter of 2008 now stands at an annualized rate of 6.3%, according to the “final” estimate released by the Commerce Department on March 26. This represents a major downshift from the third quarter of 0.5% and was the sharpest decline since the depths of the 1982 recession.
The housing production component of GDP (residential fixed investment) contracted at a 22.8% annual rate in the fourth quarter and knocked 0.8 of a percentage point from the overall GDP growth rate — quite a negative contribution from a component that now accounts for less than 3% of total GDP.
Consumer spending, which now accounts for 71% of the total, contracted at a 4.3% annual rate in the fourth quarter and registered a negative growth “contribution” of -3.0 percentage points — an extremely large drag from this part of the economy. Consumer spending rarely goes negative.
Consumer spending apparently stopped falling in the early part of this year, but serious weakness in other sectors of the economy apparently kept real GDP in free fall during the first quarter. We’re estimating -5.2%.
Residential fixed investment probably contracted at nearly a 40% pace — we’re looking for a major downshift in nonresidential fixed investment (structures as well as capital equipment and software) — and businesses undoubtedly cut inventory positions considerably in the first quarter.
Spending by state and local governments inevitably lost ground as well.
The rate of decline in real GDP should slow considerably in the second quarter — we’re estimating -2.0% — as the cutback in business inventories abates and the drag from housing lightens a bit.
We expect real GDP to stabilize around mid-year and to post modest (below-trend) growth in the second half of this year.
The GDP recovery should gather momentum during 2010, with above-trend growth emerging by the second quarter. If this pattern materializes, a significant run of self-sustaining above-trend growth will be in store for 2011 and beyond.