Economic pit looks deeper

WASHINGTON – The prospects for an economic recovery by year’s end dimmed Friday, as government data showed the economy contracted at the end of 2008 by the fastest pace in a quarter-century. The worse-than-expected data fueled doubts about whether the Obama administration had adequately sized up the challenges it faces in trying to pull the country out of recession.

Gross domestic product, a measure of the goods and services produced across the nation, shrank at an annualized rate of 6.2 percent in the last quarter of 2008, far worse than both the initial estimate of 3.8 percent and the 5 percent most analysts were expecting, according to the Commerce Department. The downward revision means the economy began the year from an even weaker position than previously thought.

“The economy really doesn’t have any momentum going into the first quarter,” Wachovia economist John Silvia said. “To the extent the economy may have been weaker, then the impact of the stimulus would be more muted.”

The Dow Jones industrial average tumbled 1.7 percent, or 119 points, capping a week in which stocks were battered by concerns that parts of the banking sector would be nationalized. Shares of Citigroup tanked 39 percent to $1.50 after the government took a large ownership in the firm. Major indexes closed down about 4 percent on the week.

The revised GDP figure helped stoke skepticism among economists who say the White House’s projections for the nation’s recovery are too rosy. Based on those projections, Obama said he would slash the deficit in half by the end of his term. In its budget outline, the administration predicted the economy would shrink 1.2 percent this year and grow 3.2 percent next year. By contrast, the consensus among private forecasters is that the economy will shrink 1.9 percent this year and grow 2.1 percent next year.

“It’s just premature to expect the economy to be recovering,” said Joshua Shapiro, chief economist at MFR, a forecasting firm. He said he expects the recession to drag into early next year.

“If you looked at the Obama administration’s forecast, it’s very much at the optimistic end of the spectrum. There’s a whole 180 degrees between us and them,” Shapiro said. “That doesn’t guarantee they’re wrong and the pessimists are right. But they are making pretty optimistic assumptions right now to hit even these terrible numbers for deficits.”

Christina Romer, chairwoman of the White House Council of Economic Advisers, told reporters Friday the administration’s growth projections were made weeks ago, before data showed an even deeper recession, and noted that it is normal for an economy to bounce back fairly sharply after a major downturn.

Speaking at monetary policy conference in New York on Friday, she said the first quarter “is going to be bad,” but the government stimulus package and other efforts would eventually bring healing.

“We are a supertanker, and it doesn’t turn quickly,” she said.

The updated fourth-quarter gross domestic product was the first of two revisions. It was based on more complete information than was available for the earlier estimate in January.

The revised data showed three of the four engines of economic growth – consumer spending, business investment and exports – slowed sharply last quarter. Consumer spending fell at an annualized rate of 4.3 percent, compared with 3.8 percent in the third quarter. Business investment in equipment and software sank at an annualized rate of 28.8 percent, compared with a decrease of 7.5 percent in the previous quarter. And real exports of goods and services plummeted 23.6 percent, compared with an increase of 3 percent in the third quarter.

Government spending, the fourth major contributor to GDP, showed signs of weakness as state and local government payments fell after increasing in the third quarter. Federal government spending grew at a slower pace.

Falling energy and food prices, which have kept inflation in check, remain among the few sources of relief for consumers and businesses. The price index for gross domestic purchases, which measures prices paid by U.S. residents, fell 4.1 percent during the fourth quarter after rising 4.5 percent in the third. Excluding food and energy, the price index rose 1.1 percent, compared with an increase of 2.8 percent in the previous quarter.