Worst U.S. economic contraction since 1982 in fourth quarter

Just a month ago the U.S. economic contraction measured by gross domestic product for the fourth quarter of 2008 had been estimated at 3.8 percent. Then the Commerce Department revised the GDP contraction to an astonishing 6.2 percent Friday, Feb. 27 on the ground of sharp declines in consumer spending, investment and exports.

Both the new and the old fourth-quarter figures marked the weakest quarterly showing since an annualized drop of 6.4 percent in the first quarter of 1982, when the country was suffering through an intense recession.

For all of 2008, the economy grew just 1.1 percent. That was down from a 2 percent gain in 2007 and marked the slowest growth since the last recession in 2001. GDP, the value of all goods and services produced in the United States, is the best barometer of the country's economic health.

The faster downhill slide came as the worst financial crisis since the 1930s intensified in the final quarter of 2008 following the government rescue of several large financial institutions and the collapse of Lehman Bros. The ensuing credit squeeze has driven consumer and business confidence to generational lows, and cost nearly 2 million Americans their jobs. The nation's jobless rate is now at 7.6 percent, the highest in more than 16 years.

Now in the second year of recession, most economists don't expect GDP to grow until the second half of the year, when the leading edge of the $787 billion fiscal-stimulus plan begins to have an impact.

The recession is expected to stretch at least through the first six months of 2009, as shoppers slash spending in the shadow of hard times at home and aboard. Companies, in turn, are being forced to cut jobs and production while resorting to other cost-saving measures to survive.

Federal Reserve Chairman Ben Bernanke said earlier in the week that he was confident the economy would rebound modestly later this year and into 2010, but only if the government's efforts to stabilize the banking system prove successful.

Highest loan delinquency rate since 1992

Loan delinquency rate of U.S. banks stood at 4.6 percent in the last quarter 2008. That's the highest delinquency rate since 1992 in the aftermath of the savings & loan crisis. The seasonally adjusted delinquency rate rose from 3.7 percent in the third quarter 2008. A year ago, the delinquency rate was 2.4 percent.

The delinquency rate for residential real estate spiked up to a record 6.3 percent in the fourth quarter from 5.2 percent in the third quarter and 3 percent a year earlier. Delinquencies for commercial real estate loans increased to 5.4 percent in the fourth quarter from 4.7 percent in the third, and double the rate a year earlier.

Consumer credit card delinquencies jumped to a record 5.6 percent from 4.8 percent in the third quarter.

Banks charged off a record $35.5 billion in the fourth quarter 2008, up from $24.2 billion in the third quarter and $13.9 billion in the fourth quarter a year earlier. The charge-off rate increased to 1.9 percent from 1.5 percent in the third quarter.

Double bubbles trigger U.S. financial crisis

Current economic mess in America is steamed from and centered in the financial mess, and then spill over to other sectors of economy. This crisis, like most others in rich countries, emerged from double bubbles: property bubble and a credit boom.

House prices doubled only in five years. The scale of the bubble was about as big in America’s ten largest cities as it was in Japan’s metropolises. But nationwide, house prices rose further in America and Britain than they did in Japan. So did commercial-property prices.

In absolute terms, the credit boom on top of the housing bubble was unparalleled. In America private-sector debt soared from $22 trillion (or the equivalent of 222 percent of GDP) in 2000 to $41 trillion (294 percent of GDP) in 2007.

Judged by standard measures of banking distress, such as the amount of non-performing loans, America’s troubles are probably worse than those in any developed-country crash bar Japan’s. A recent estimate by Goldman Sachs suggests that American banks held some $5.7 trillion-worth of loans in “troubled” categories, such as sub-prime mortgages and commercial property. That is equivalent to almost 40 percent of GDP. As a comparison, non-performing loans in Japan they hit 35 percent of GDP at the peak of the crisis, according to the IMF. In Sweden reached 13 percent of GDP.

Today’s financial crash is not just in regulated banking sector. America also faces simultaneous collapse of the shadow banking system, the universe of investment banks and hedge funds responsible for much of the recent securitization boom as well as for the sharp rise in financial leverage.

As a result, standard measures of banking distress, such as the level of non-performing loans, understate the contraction pressure. So far most of the credit collapse in America has come from the demise of securitization. In 2007, for instance, $668 billion of non-traditional mortgages were securitized. Last year that figure dropped to $40 billion. Rapid deleveraging outside traditional banks also means that cleaning up banks’ balance-sheets may not break the spiral that is driving down asset prices and stalling financial markets. Financial-sector debt was the fastest-growing component of private-sector debt in recent years. Many of those excesses are being unwound at warp speed.

$787 billion package to revive U.S. economy

Senators voted to approve a $787 billion economic stimulus package on Friday, Feb. 13 following an earlier vote in the House.

The bill is a mixture of tax cuts, government spending, aid to states, and relief to the unemployed that Obama says will create 3.5 million jobs.

The Senate vote was 60 to 38; three Republicans voted for it.

The House had approved an earlier $825 billion version of the package without any Republican support last week. On Tuesday, Feb. 10, the Senate voted to approve a different $838 billion version with few Republicans opting to back it. The two versions had to be reconciled in a joint House-Senate committee before facing final votes in the two chambers.

U.S. senate approves economic recovery package

Senate approved an $838 billion economic stimulus bill on Tuesday, 02/10/09. The bill backed by the White House survived a key test vote in the Senate Monday despite strong Republican opposition. Monday's vote was 61-36, one more than the 60 needed to advance the measure toward Senate passage on Tuesday.

The bill is a mixture of tax cuts, targeted spending on infrastructure projects and money to cash-strapped states. The stimulus is desperately needed to tackle the worst economic crisis in more than a generation.

The measure must now be reconciled with a $819 billion House version before being sent to Obama for signature. The president has warned of economic "catastrophe" without the bill.

U.S. economy at nearly 27 years low

The U.S. economy measured by GDP contracted at an annual rate of 3.8 percent in the fourth quarter of 2008, according to the Commerce Department. The fourth quarter marks worst performance for U.S. economy in nearly 27 years, since 1982. The U.S. gross domestic product totaled $11.599 trillion in the fourth quarter, the government said.

If unwanted buildup of goods on store shelves is excluded, a clearer picture of the economy emerges, as economic output would have fallen by 5.1 percent. This is the weakest in 28 years.

Declines in consumer and business spending were offset by inventories and government spending. The trade sector made a small positive contribution to growth as a sharp drop in imports was larger than the decline in exports.

Consumer spending, considered an engine of economic growth, fell 3.5 percent in the fourth quarter, as opposed to a 3.8 percent drop in the third quarter.

The business cycle committee of the National Bureau of Economic Research said recession in the economy began in late 2007, but with this data, there are now officially two quarters of decline in GDP, the classic definition of a recession.

The economy has grown just 1.3 percent in the past year, the weakest growth rate since 2001.