America’s recession may now be matching the early 1980s in severity, a trend that in turn is amplifying a broader global recession.
America’s gross domestic product, the nation’s output of goods and services, plunged at an annual rate of 6.2 percent in the final quarter of 2008, according to revised figures released by the Commerce Department Friday. That’s the sharpest drop in GDP since the first quarter of 1982.
Economists at the investment firm Goldman Sachs estimate that the decline, coupled with another slide in the current quarter, may end up as the US economy’s worst back-to-back quarters in half a century.
A cutback in consumer spending is not only dragging down US growth, but global growth as well. Japan and the European Union are now in recession, and China’s export-driven economy has downshifted sharply. Now it’s not just that Americans aren’t importing -- neither is the rest of the world. A decline in exports by US corporations was one key factor behind Friday’s GDP surprise.
The suddenness of the drop has caught much of the world off guard.
Down payment on a rescue
Heading into a weekend meeting of European leaders, international instutitions including the World Bank announced a $31 billion rescue fund for East European banks, which are at risk from a global contraction in credit. That may be just a down payment, and just for one troubled region.
“This is not a crisis of one region, it’s a global crisis. It needs a global solution,” World Bank President Robert Zoellick said this week.
And regarding East Europe in particular, he said the region may require $120 billion to recapitalize cash-strapped banks.
“This is a time for Europe to come together to ensure that the achievements of the last 20 years are not lost because of an economic crisis that is rapidly turning into a human crisis,” Mr. Zoellick said.
Meanwhile, there's Citigroup
If East Europe was the global hot spot of the week, the credit crisis was still a top issue in America as well on Friday. The mega-bank Citigroup announced a deal in which the US government will convert a large chunk of a prior investment, designed to shore up the bank, from preferred shares into common stock.
The share conversion gives the US government roughly a one-third ownership stake in Citi, and aids the bank because common equity represents a stronger form of capital than preferred shares. For banks in the US and around the world, capital reserves provide the foundation to remain solvent during tough times as losses on real estate and other loans mount.
Governments and global institutions are becoming the capitalizers of last resort, because a collapse of banks would only deepen the recession.
The US remains the world’s largest economy -- and a key engine of trade because its imports have been so large in recent years.
For much of 2007 and 2008, American consumers were cutting back on their purchases of imported goods as the US economy cooled. Rising exports were a bright spot for the US economy.
But in the final quarter of 2008, as the credit crisis deepened, trade dropped precipitously. In Friday’s news report on the US economy, this showed up as a 16 percent annualized decline in imports, and a 24 percent decline in exports. Consumer spending, the bulk of US economic activity, fell at a 4.3 percent pace. Business investment, including construction, fell 21 percent.
Need for more government stimulation
That helps explain why so much focus now is on government efforts to stimulate growth.
A month ago, the Commerce Department had pegged fourth-quarter pace at minus 3.8 percent. Economists expected the number to be revised upward. The surprise was the magnitude of the revision -- to a 6.2 percent decline. It was the largest revision ever, in records that go back to 1976, according to the Associated Press.
The wire service also offered two other snapshots of the global slump Friday. Russia’s economy shrank 8.8 percent in January, compared with a year earlier, with the nation’s energy-reliant economy hit hard by a drop in oil prices. And Japan’s industrial production plunged at a record pace in January, as collapsing trade forced manufacturers to cut jobs.
For all the dire signs, economists generally believe the downward spiral will be broken this year. A US recovery will begin later this year or in 2010, most American forecasters say.
“We are not doomed to a lost decade of the sort experienced by Japan in the 1990s,” Mr. Baumohl says. “Nor are we in a depression. We view the drop in GDP in the last quarter, which we may see repeated in magnitude this quarter, [as] symptomatic of a recession in its final convulsive stages, to be followed by a recovery in the second half of the year.”