Drop in GDP reflects significant problems in the world economy

If you wonder why the machinery maker Caterpillar is laying off more than 20,000 of its workers, the answer comes through loud and clear in the latest report on America’s gross domestic product.

Americans’ production of goods and services fell at a 3.8 percent annual pace in the final quarter of 2008, and one of the steepest parts of the slide was in exports.

The global economic downturn means that Cat, which not many months ago was one of corporate America’s big stories of industrial success, is selling a lot fewer excavators and pipe layers.

For years, US exports grew faster than GDP. But in the most recent quarter exports fell much faster than the rest of the economy, declining at a 20 percent annual pace.

It’s a sign of how a recession that began with trouble in American mortgages has gone global, and now that global impact is bouncing back at the US.

“That’s a huge decline in what has been … the fastest growing sector of our economy,” says Ken Mayland, who heads ClearView Economics, a consulting firm near Cleveland. Any pullback from globalization and trade “threatens to dull and tarnish the overall world prospects for growth.”

The GDP report, released by the Commerce Department on Friday, also unveiled sharp weakness by consumers at home – but the overall decline in economic activity was not as big as economists had forecast.

One reason was that business inventories rose more than expected, placing a temporary mask on the overall weakness. Consumer spending fell at a 3.5 percent annual pace for the quarter, similar to the retrenchment a quarter earlier.

Deflation for the first time since the 1950s

Since all these numbers are on an inflation-adjusted basis, it’s worth noting that in the fourth quarter an unusual thing happened: The gauge of overall prices used to adjust the GDP numbers showed deflation for the first time since the 1950s. The deflationary pressures spread beyond oil to affect the prices of holiday retailers.

Durable goods including big-ticket items such as automobiles have been hit particularly hard by the consumer slowdown.

President Obama focused on the economy’s troubles again Friday, unveiling a task force to focus on strengthening the middle class. He urged quick passage of his economic stimulus plan. But he also said the economy needs more than just more jobs, it needs better ones that offer average Americans “a way forward and a way up.”

For now, hard times for Americans are being felt not only at home but abroad. Imports to the US declined at a nearly 16 percent annual pace.

“A lot of the burden of the US slowdown is being borne by foreign producers,” Mr. Mayland says.

Since GDP measures goods and services produced at home, exports add to GDP, while imports are subtracted out. In the most recent quarter, the sharp drop in exports and imports essentially cancelled each other out in terms of their effect on the nation’s growth rate.

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