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Posted: March 09, 2009

More ugly

The worst quarterly performance since '82

Jeff Thredgold

Forecasting economists were surprised in very late January when the U.S. Commerce Department announced that U.S. gross domestic product, the most inclusive measure of all goods produced and services provided in the American economy, declined at a 3.8 percent real (after inflation) annual rate. The surprise was that the announced economic measure was not closer to the 5 percent to 6 percent real annual rate of decline that was the consensus view.

It turns out that the Commerce Department’s first official revision to the data, based on more complete economic information,  now suggests the U.S. economy contracted/fell/dived/dropped at a 6.2 percent real annual rate during the October to December 2008 quarter.

By the way, once the Commerce Department officially revises the data again in later this month -- and they will very likely do it again down the road… any time they feel the need. Note that the major downward revision from a disgusting 3.8 percent annual rate of decline to a really disgusting 6.2 percent annual rate of decline was almost five times the typical average revision and the largest revision in a generation…

…talk about adding insult to injury!

Ironically, a key factor that led the initial estimate to be a less-than-expected rate of decline, but was actually a negative development… was also a key factor in the new data, although it is actually a positive development in regard to growth in coming quarters…

…I’m well on my way to becoming a more traditional economist… even I don’t understand what that statement just said!


As noted frequently in the past, GDP is a measure of what is produced, not what is sold. As a result, any time inventories of produced goods rise unexpectedly during a quarter, future goods production typically must be trimmed so as to avoid too many goods on the shelves. Suffice to say that business inventories did not rise as had been reported in the first estimate, but actually fell. While it makes the fourth quarter GDP estimate worse, it actually bodes better for production in following quarters…

…again, a mouthful.

Consumer weakness

The other key factor in the downward revision was a larger-than-previously reported drop in consumer spending. It seems that consumer spending, which represents roughly 70 percent of total U.S. economic activity, actually contracted at a 4.3 percent annual rate last quarter, the most since 1980. The 4.3 percent rate of contraction, when combined with the 3.8 percent rate of decline during the prior quarter, was the first time consumer spending has weakened by at least a 3 percent annual rate during consecutive quarters since recordkeeping began in 1947… a mere 61 years (

Since ’82

The revised 6.2 percent real annual rate of decline in the economy was the worst quarterly performance since 1982. Most estimates for the current quarter are around a 4 percent to 5.5 percent real annual rate of decline, with a decline closer to 1.5 percent - 2 percent during the April to June quarter. As before, the consensus of forecasting economists still expects U.S. economic growth to return to weak, but at least positive, growth during the third and fourth quarters. I still think the first positive quarter will be 2009’s final quarter.

The sky is falling

Those who follow my weekly attempts at discussing the economy and financial markets know that I see a direct correlation between developments during the week including Friday, Sept. 18, 2008, and the immediate surge in job losses. The weak fourth quarter GDP data also supports this view. Again, think back to Sept. 18 last year. This was the day that Federal Reserve Chair Ben Bernanke and then-U.S. Treasury Secretary Hank Paulson held a news conference and emotionally asked the U.S. Congress for $700 billion to deal with a crisis in financial markets and among many Wall Street banks and investment firms…

…Oh, that’s right, they provided a two-and-a-half page memo to support their view. In prior weeks and months, Wall Street investors and lenders knew of major problems within the domestic and global financial markets. However, it was that weekend, in my view, when the average person on Main Street, who might have heard various and occasional rumblings about financial issues, was made much more aware of the problem…

…hearing from Bernanke and Paulson that “the sky was falling”… as well as what typical Americans gleaned from the emotional debate during the next week within the Congress, scared millions of people to death. The result is seen in the fourth quarter GDP data, as well as in the plunge in monthly employment totals beginning last October.

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The Tea Leaf is a weekly economic and financial update by Jeff Thredgold, economist for Vectra Bank Colorado. He has been writing an economic update every week for the past 31 years and is the only economist in the world to have received the designation of CSP, or Certified Speaking Professional. Republished with permission from the Tea Leaf by Jeff Thredgold, whose site address is
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