US economy suffers biggest slowdown in 26 years

The US economy suffered its biggest slowdown in 26 years in the last three months of 2008 as consumer spending recorded the worst slide in the post-war era, a trend that's likely to continue in the coming months.

Gross domestic product, the broadest measure of the nation's economic activity, fell at an annual rate of 3.8 percent in the fourth quarter, adjusted for inflation, according to official figures released Friday.

That's the largest drop in GDP since the first quarter of 1982, when the economy suffered a 6.4 percent decline. But the pace of contraction was less than forecast, with a buildup of unsold goods cushioning the blow.

As consumer spending accounts for more than two-thirds of overall economic activity, without the jump in inventories, the decline would have been 5.1 percent, the Commerce Department said.

Hit by tight credit and soaring job losses, Americans slammed the brakes on spending in the quarter and consumer spending fell at a 3.5 percent annual rate, with spending on big-ticket durable goods plunging at a 22 percent pace.

But it wasn't just consumers pulling back. Fixed investment in equipment and software, taken as an indication of business spending, plunged at an annual 28 percent rate. And consumers and businesses outside the United States also had less demand for US goods, as exports fell at nearly a 20 percent annual rate.

Economists warned that the less severe than expected drop in GDP was due to a number of factors that suggested more weakness ahead.

"When the economy is dropping fast it is hard for firms with plummeting sales to halt inventory accumulation," Robert Brusca of FAO Economics was cited as saying by CNN. He said since companies are likely to respond to the excess inventories by slashing production at the start of this year, GDP will be weaker in the next few quarters.

In addition, prices for goods and services fell more than expected during the quarter. That limited the decline in GDP, which is adjusted lower to account for inflation.

The prices paid by consumers during the quarter fell at an annual 5.5 percent rate in the quarter, due primarily to lower gas prices. That's the biggest such decline in that key price measure since the Commerce Department started calculating it on a quarterly basis in 1947.