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GDP Falls 3.8% In U.S. As Economic Meltdown Worsens

January 31st, 2009
The U.S. Commerce Department has released preliminary figures for the 4th quarter of 2008, heralding a decline of 3.8% in GDP. As many analysts had forecast a Q4 contraction of at least 5%, on the surface the official figures could be perhaps spun by those taken to wishful thinking as “not as bad as feared.” Several headlines in the financial press actually conveyed this myopic fantasy. However, for once, even the usual Wall Street cheerleaders were not fooled by the “not as bad as we thought” mantra. In the first place, they know the government’s figures are preliminary and, like the unemployment numbers, are likely to be adjusted upwards once complete data for the last quarter is fully tabulated. Secondly, even the Commerce Department’s numbers indicate that the economic contraction in the world’s largest economy is much worse than negative 3.8 %.
The gap between what analysts predicted and what the government reported is explained by a statistical anomaly whereby expanding inventories of unsold goods are counted as “growth.” The growth of inventories “added” 1.3% to the GDP. This book-keeping exercise in imagined growth is due to the simple fact that consumer demand in the United States declined at a faster rate than businesses could cut back production and delivery. However, the lag between production and demand will not persist much longer, evidenced by the tsunami of employee layoffs that are now sweeping the United States. What this suggests is that the negative downturn for the first quarter of 2009 will be even more severe than otherwise.

Had the expansion of unsold or unwanted inventory not been factored in as GDP growth, than the Commerce Department would have reported a GDP decline of 5.1% for Q4 of 2008. It is likely that Q1 of 2009 will reveal an acceleration of GDP contraction of the American economy. GlobalEconomicCrisis.com is projecting that complete tabulation for the first quarter of 2009 will reveal a GDP contraction in the range of 6-7%.

What do these economic statistics mean in real terms? The answer is clear; the U.S. economy is in terminal free-fall. Even with the passage of the Obama stimulus plan, at best the U.S. can temporarily arrest 1-2% off the rate of annual GDP contraction. However, further erosion of the U.S. fiscal posture resulting from exploding structural deficits and the cumulative national debt will rapidly negate the very temporary boost from the stimulus package, while facilitating further catastrophic macroeconomic destruction.

The implosion of the world’s largest economy will ensure that the Global Economic Crisis is acute and of long duration. Policy responses thus far from political leaders and the financial elites that influence them are about as encouraging or realistic as inflating the U.S. GDP figures by counting the accumulation of unsold goods as evidence of economic growth and expansion. It appears that those in power have not learned much from the recent experience of counting subprime mortgage-backed securities as solid and secure assets.




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