Economic activity contracted at a much slower than expected pace in the last three months of 2008, according to a report released by the Commerce Department on Friday, although the data still confirmed that the U.S. economy was in recession in the latter half of the year.
The report showed that GDP decreased at an annual rate of 3.8 percent in the fourth quarter following a 0.5 percent decrease in the third quarter. Economists had been expecting a more substantial decrease of about 5.4 percent.
While the National Bureau of Economic Research has suggested that the recession began back in December of 2007, the standard definition of two consecutive quarters of contraction was not met until the release of the fourth quarter data.
"The good news is that GDP did not fall as much as expected in the fourth quarter," said Chris Low, Chief Economist at FTN Financial. "The bad news is that production must be slashed in Q1 to bring inventories back into line with sales."
"Whatever superficial joy comes from beating the Street estimate on this number is likely to be short-lived as economists move the trough of the recession in their forecasts forward from last year's fourth quarter to this year's first quarter," Low added.
The Commerce Department said that the continued contraction in GDP in the fourth quarter primarily reflected negative contributions from exports, consumer spending, equipment and software spending and residential fixed investment.
At the same time, the weakness was partly offset by positive contributions from private inventory investment and federal government spending as well as a decrease in imports.
A substantial turnaround in exports contributed to the acceleration in the pace of contraction compared to the third quarter, with exports falling by 19.7 percent in the fourth quarter following a 3.0 percent increase in the previous quarter.
The faster pace of contraction compared to the previous quarter also reflected a steeper decline in spending on equipment and software, which fell 27.8 percent in the fourth quarter.
However, a much larger decrease in imports, which are a subtraction in the calculation of GDP, helped to partly offset the acceleration in the pace of contraction. Imports fell by 15.7 percent in the fourth quarter following a 3.5 percent decrease in the third quarter.
The report also showed a modest slowdown in the pace of the decline in consumer spending, which fell by 3.5 percent compared to the 3.8 percent decrease in the previous quarter.
The Commerce Department also said that its closely watched reading on core consumer prices, which exclude food and energy prices, edged up 0.6 percent in the fourth quarter following a 2.4 percent increase in the third quarter.
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