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.

But that doesn’t mean that sharp drop is unimportant.

The sharp plunge reflects significant problems for the world economy. In recent years, the world economy overall has seen its fastest growth in modern times. The expansion of commerce has meant expanding productivity rates and jobs, allowing most nations to grow faster than they could without such ties.

Now, the globe could see its first overall decline in the volume of trade in many years.

On Friday, Caterpillar announced it plans to cut another 2100 jobs, on top of some 20,000 layoffs announced earlier in the week.

“[Caterpillar] must drastically reduce our production levels and cost structure to remain competitive for the long run,” Bob Williams, a company vice president, said in a statement. Cat has 113,000 employees worldwide.

New worries about protectionism

Some economists worry that the recession could cause nations to focus more on self-interest -- with the risk that measures designed to protect domestic jobs could backfire by deepening the global downturn.

So far, this remains more a risk than a reality. The danger is that modest actions could end up provoking larger ones.

"The latest versions of the US fiscal stimulus package contain provisions regarding 'domestic content,'" Richard Bernstein, chief investment strategist at Merrill Lynch, said in a note to clients Thursday. "The protectionist trend is gaining strength much faster than we thought even just a few weeks ago."

The delicate US-China relationship -- with China relying on huge exports and America being the largest importer -- faces new tension. As a presidential candidate, Barack Obama pledged to take a tougher line on trade issues with China. Beijing reacted angrily last week when US Treasury Secretary Timothy Geithner told senators at his confirmation hearing that China was manipulating its currency.

Vice President Joe Biden said on Thursday the Obama administration had made no determination on whether China was manipulating its currency and would not make a unilateral attempt to block its exports.

In a phone call Friday, Chinese President Hu Jintao told President Obama that he wanted to strengthen cooperation between the two countries to fight the global economic slowdown, China’s Xinhua news agency reported.

Of course, one man’s “protectionism” can be another’s bid to correct abuses of current trade law. But economists generally say that a recession is a risky time for trade relations to fray. In the Great Depression, rising trade barriers deepened the downturn.

Wire service material was used in this report.