GDP Contracts 3.8% Fourth Quarter; Largest Drop Since Deep Receession of 1982

There are two bright spots. 1982's contraction wasn't merely sharper, it was greatly sharper. And analysts had predicted a 5.4% contraction.

The economy shrank at its fastest pace in nearly 27 years in the fourth quarter, government data showed, sinking deeper into recession as consumers and business cut spending.

The Commerce Department on Friday said gross domestic product, which measures total goods and services output within U.S. borders, plummeted at a 3.8 percent annual rate, the lowest pace since the first quarter of 1982, when output contracted 6.4 percent. GDP fell 0.5 percent in the third quarter. These were the first consecutive declines in GDP since the fourth quarter of 1990 and the first three months of 1991.

Analysts polled by Reuters had forecast GDP contracting 5.4 percent in the fourth quarter. The U.S. economy slipped into recession in December 2007, driven by the collapse of the housing market and resulting global credit crisis.

There are other optimistic signs. As already noted, the credit crisis is either passed or at least substantially abated:

But back to the market problem overall: Investors continue to ignore one of the very brightest spots in the firmament: Namely, the credit freeze is thawing, according to all manner of key interest rates and spreads. In fact, LIBOR is around 1 percent now, back to where it was in the early summer of 2007 before the crunch started. This means that much of the uncertainty about lending, borrowing, investing, and hiring is receding from the market. This is a very positive sign. While retail sales and jobs are lagging indicators, the credit-market improvement is a leading indicator — pointing to recovery in the economy sometime this spring or summer.

The Fed, too, thinks a recovery is possible later this year:

The Fed was very gloomy in its Open Market Committee statement today. It suggested a gradual recovery could begin later this year, although there are plenty of downside risks. The Fed will keep its target rate near zero, and will keep expanding its balance sheet by purchasing plenty of government-sponsored debt and mortgage-backed securities. Its so-called TALF plan to finance consumer-related bonds will begin soon. It might even buy Treasuries, even though it can’t quite make its mind up on that. Taken together, these actions will keep injecting more cash into the financial system.

...

There’s a lot of talk that a government bad bank could be modeled after something like the old Resolution Trust Corp. But this would require regulatory accounting forbearance of the punitive mark-to-market approach. It could be done if the SEC would work in connection with a new bad bank. And it might help get private investors engaged in buying toxic assets from the bad bank if the capital-gains tax was suspended for a couple of years.

Meanwhile, important forward-looking economic indicators suggest we have seen the bottom — believe it or not.

First and foremost, stocks bottomed in late November and are about 15 percent higher today. Raw commodity indexes have bottomed. 10-year Treasury rates have bottomed and yields today are about 50 basis points higher. Oil prices have bottomed. And the dollar bottomed many months ago. Plus, the Fed’s monetary-base expansion has produced about a $550 billion increase in the M2 money supply, which could start raising the economy as early as this spring.

If the turnover rate of money — that is, velocity — moves back to its 10-year average, then we could all be surprised by a substantial economic rebound starting this spring or summer.

That's Larry Kudlow, who is an indefatigable optimist, but that doesn't mean he's wrong. More often than not he's right. And the Fed itself agrees that a late-2009 recovery is quite possible.

So why are we possibly slitting our economic necks with this "stimulus"? Do the Gods of Money Multipliers demand a blood sacrifice?

posted by Ace at 04:11 PM

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