US Economy Falling at Fastest Pace in 26 Years

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30 January 2009

In its first report on economic activity in the depressed final three months of 2008, the U.S. Commerce Department says gross domestic product shrank at a 3.8 percent annual rate. As bad as figures were, they were better than what financial markets had feared.

By all accounts, the nation's economic downturn is deepening.

The Commerce Department reveals that consumers are cutting back on purchasing and paying off debt. Businesses are similarly cutting back and as commerce slows retailers and manufacturers are laying off workers.

The 3.8 percent decline follows a more modest five tenths of one percent contraction in the third quarter. It was the first back-to-back quarterly decline since 2001. For all of 2008 the U.S. economy grew by 1.3 percent. Negative growth of two percent in predicted for 2009.

While some analysts had expected a steeper five percent decline in GDP, the growing number of layoffs is causing the greatest concern. Over half a million Americans lost their jobs in December, bringing the 2008 total to 2.6 million lost jobs. The pace of layoffs is continuing.

Jim Paulson, a money manager in Minneapolis, is skeptical that the $800 billion stimulus program working its way through Congress will have the intended result. He favors more tax incentives to create jobs.

"I'd rather see us treat the confidence of the healthy players that have just shut down because they're scared, as opposed to keep trying to treat the impaired players - like trying to treat unemployment or foreclosures. The best thing we can do for that problem is to get healthy players spending again, through confidence," he said.

President Obama's fiscal stimulative program is heavily weighted towards increases in government spending, to stimulate economic activity. The government's budget deficit is at record levels and is expected to rise further. Official interest rates are at record lows. But despite all these measures, economic activity has not yet recovered.