Economy Continues To Slow – 6.3% Decrease Reported

Economy dips at slightly faster 6.3 percent pace

WASHINGTON – The economy shrank at a 6.3 percent pace at the end of 2008, the worst showing in a quarter-century, and probably isn’t doing much better now.

The Commerce Department on Thursday reported that the economy was sinking a bit faster than the 6.2 percent annualized drop for the October-December quarter estimated a month ago.

And the pain has persisted in the current quarter. New claims for unemployment benefits last week rose to a seasonally adjusted 652,000 from the previous week’s revised figure of 644,000, the Labor Department said Thursday. The total number of people claiming benefits jumped to 5.56 million, higher than economists’ projections of 5.48 million, and a ninth straight record-high. [SEE: Unemployment claims rise to 40-year high; retail sales drop – ]

The figures indicate the labor market remains weak even as some other economic indicators come in better than expected.

Consumers are cutting back under the weight of rising unemployment, falling home values and shrinking investment portfolios. Those factors have forced companies to slash production and jobs. All the negative forces are feeding on each other in a vicious cycle that has deepened the recession, now in its second year.

Economists were bracing for an even sharper 6.5 percent annualized decline in the government’s third and final estimate of gross domestic product for the fourth quarter.

Still, the results were dismal. The economy started off 2008 on feeble footing, picked up a bit of speed in the spring and then contracted at an annualized rate of 0.5 percent in the third quarter.

The faster downhill slide in the final quarter came as the financial crisis — the worst since the 1930s — intensified.

The main culprit behind the GDP downgrade was that businesses’ cut inventories more deeply than estimated a month ago. That shaved 0.11 percentage points off fourth-quarter GDP, rather than adding 0.16 percentage points in the previous report.

Builders also cut spending on commercial construction more deeply through previously thought.

Many analysts believe the economy will keep shrinking at least through the first six months of this year.

This last comment is the key. The recession may now be in it’s 16th month. History teaches us that the “recovery cycle” will begin in the next 3 to 6 months – without any Government intervention or the incredible spending presently scheduled by the Government. The inevitable increase in taxes, to pay for the spending, and the equally inevitable increase in interest rates associated with massive Government borrowing are, or should be, the real worry. Higher taxes and higher interest rates may act to stall or reverse the normal recovery “cycle”.  

The earliest of  the Government’s “scheduled” spending will not  be infused into the economy for 36 to 48 months. Most of  the “scheduled” spending won’t even take place for 36 to 48 months. 

03/25/09   –  A $34.0 billion auction of five-year Treasury notes drew lighter demand than recent offerings, and may have jogged concerns that foreign buyers could lose their appetite for purchasing U.S. debt.

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