Reuters - U.S. economy shrinks, profits plunge in Q4

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U.S. economy shrinks, profits plunge in Q4

Thursday, Mar 26, 2009 1:26PM UTC

By Lucia Mutikani

WASHINGTON (Reuters) - The U.S. economy shrank at its fastest pace since 1982 in the fourth quarter and corporate profits plunged a record $120.1 billion, pulled down by falling consumer spending and exports, government data showed on Thursday.

In another snapshot of the ailing economy, the number of workers collecting state unemployment benefits rose to a record 5.56 million earlier this month, while new claims climbed to 652,000 last week, a separate government report showed.

"I think people realize the economy seemingly fell off the cliff in the fourth quarter and continued in the first quarter this year. The question now is will you see a moderation in bad news?" said Doug Bender, managing director at McQueen, Ball & Associates in Bethlehem, Pennsylvania.

U.S. equity index futures pared gains after data, while U.S. government bond prices and the dollar were little changed.

Gross domestic product, which measures the total output of goods and services within U.S. borders, fell at an annual rate of 6.3 percent in the October-December quarter, the steepest decline since the first quarter of 1982, the Commerce Department said.

The government last month estimated the fall in fourth-quarter GDP at 6.2 percent and the modest revisions to the output estimates reflected adjustments to business inventories and investment figures.

The economy expanded 1.1 percent in 2008, the smallest advance since 2001, after growing 2.0 percent in the prior year, the department said.

Private business inventories were revised to show a $25.8 billion decline, previously reported as a $19.9 billion fall, as business responded to the slump in demand by cutting output.

Business investment, which is typically made when companies are planning production increases, fell at a 21.7 percent rate, the biggest fall since the first quarter of 1975, from a previously estimated 21.1 percent contraction. Residential investment fell 22.8 percent in the fourth quarter.

"Investment is down big time, and that will be down in the current quarter, so that is not going to help," said Kurt Karl, head of economic research at Swiss Re in New York.

"Going forward, the only positive light in the short term is going to be the consumer, and eventually that will turn the corner for us but it won't be enough this quarter to turn the corner," he said.

Consumer spending, which accounts for more than two-thirds of domestic economic activity, dropped a 4.3 percent rate, unchanged from last month's estimates.

Exports were down 23.6 percent, also unrevised from last month's report.

The department said corporate profits after taxes plummeted by a record $120.1 billion in the fourth quarter. The 10.7 percent drop was the biggest decline since the first quarter of 1994.

A separate report from the Labor Department showed the number of workers collecting state unemployment benefits surged 122,000 during the week ended March 14, from 5.44 million the prior week.

That pushed the insured unemployment rate to 4.2 percent from 4.1 percent the prior week, the highest since May 1983.

The four-week moving average for new claims, considered to be a better gauge of underlying trends as it irons out week-to-week volatility, fell to 649,000 from a revised 650,000 the week ended March 14.

It was the first drop in that series after nine weeks of rises.

(Additional reporting by Doug Palmer in Washington and John Parry in New York, Editing by Andrea Ricci)