Recession appears to be picking up steam

John W. Schoen Senior producer • Profile • E-mail

The latest reading on the economy showed that the gross domestic product shrank at a rate of 3.8 percent in the fourth quarter, the worst result since 1982.

The slide wasn't as bad as the nearly 6 percent drop many forecasters had been expecting. But the better-than-expected performance was the result of a build-up of unsold inventories — which means businesses will have to cut production that much further to cope with the rising backlog of unsold goods.

The report was just one more indication that as the recession has spilled over into the new year, it may be picking up speed.

As the government advances historic measures to revive growth, the data point to an economy that is getting worse. It’s far from clear the government actions — including a massive stimulus program and major intervention in the banking system — will stem the slide and restart the economy by year-end.

But even if it does, analysts say the recovery — when it comes — will likely be weak and slow.

With home prices continuing to fall and layoffs rising, the sharp pullback in consumer spending is a powerful force driving the economic contraction. That spending pullback will continue for some time to come, according to Stephen Roach, Morgan Stanley’s Asia chairman.

“The biggest force on the demand side of the world economy — the multiyear compression of the American consumer — is going to be ongoing,” he said. “This trend has only just begun.”

The ongoing retrenchment by American consumers makes it unlikely spending will return to pre-recession levels for many years. During the height of the lending boom, consumer spending surged to roughly 71 percent of gross domestic product — up from just 66 percent in 1990.

Since much of that spending was based on unsustainable borrowing, the post-recession economy will remain smaller until that shortfall can be made up from other sources of demand. With the rest of the world also in recession, at the moment, it’s hard to see where those other sources of demand will come from, analysts say.

The root cause of the recession — the collapse of the housing industry — shows no signs of letup. Prices fell by a record 18 percent in October 2008, according to the latest Standard & Poor’s Case-Shiller index, and analysts say prices could continue falling well into next year. A pickup in existing-home sales in December was due largely to homes being bought at cut-rate prices in foreclosure.

“In fact the downdraft is probably gaining steam,” said Michael Englund, chief economist with Action Economics. “We are assuming going into 2009 we may be seeing some bottom, but we certainly are not seeing any sign yet in any of the reported data.”

The homebuilding industry — a key driver of the economy — is suffering one of its worst downturns in history. On Thursday, the Commerce Department reported that the pace of new home sales fell to an annual rate of just 331,000. Even after dropping 76 percent from a peak pace of 1.38 million homes sold in July 2005, analysts say they don’t see a bottom yet.

“(New home) sales will continue to drop because of falling prices for existing homes, tighter credit and a deteriorating economy,” according to Patrick Newport, an economist with IHS Global Insight.

That deteriorating economy has also brought a massive wave of layoffs that also shows no signs of letup. The Labor Department reported Thursday that a record 4.85 million people were collecting regular unemployment benefits in the latest week. That doesn't include about 1.7 million people getting benefits through an extension passed last summer; that puts the total number of people on unemployment closer to 6.5 million. Millions more are working reduced hours or have exhausted jobless benefits.

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