US economy likely suffered deeper contraction

The US economy's downhill slide at the end of last year was likely much steeper than the government initially thought and it is probably doing just as poorly now if not worse as a relentless slew of negative forces feed on each other, pushing the country deeper into recession.

American consumers spooked by vanishing jobs, sinking home values and shrinking investment portfolios have cut back. In turn, companies are slashing production and payrolls. Rising foreclosures are aggravating the already stricken housing market, hard to get credit has stymied business investment and is crimping the ability of some consumers to make big ticket purchases.

It's creating a self perpetuating vicious cycle that is causing the economy to deteriorate at a rapid pace. The country is suffering through the worst housing, credit and financial crises since the 1930s.

The Commerce Department is set to release a report on Friday expected to show the economy contracted at a pace of 5.4 per cent in the October to December quarter. If economists are correct, the updated reading on gross domestic product, or GDP, would show the economy sinking faster than the 3.8 per cent annualized decline the government first estimated a month ago. GDP measures the value of all goods and services produced within the United States and is best barometer of the country's economic health.

"The economy kind of fell off a cliff and unleashed all of these negative downward spirals that are feeding on each other and still are," said Bill Cheney, chief economist at John Hancock Financial Services.

The new projected GDP figure like the old one would mark the weakest quarterly showing since an annualized drop of 6.4 per cent in the first quarter of 1982, when the country was suffering through an intense recession.

Looking ahead to the current January to March quarter, economists believe it is also shaping up to be quite weak, with many projecting an annualized drop of 5 per cent. Given the dismal state of the jobs market, some economists believe an even sharper decline in first quarter GDP is possible.

"It doesn't appear as if the free fall in the economy has slowed down at all," said Stuart Hoffman, chief economist at PNC Financial Services Group. "So far, there is no net."

Many predict the economy will continue to shrink in the April to June quarter though not as deeply by around a 1.7 per cent pace.

To jolt life back into the economy, President Barack Obama recently signed a $787 billion recovery package of increased government spending and tax cuts. The president also unveiled a $75 billion plan to stem home foreclosures and Treasury Secretary Timothy Geithner said as much as $2 trillion could be plowed into the financial system to jump start lending.

A massive pullback by consumers is playing a prominent role in the economy's worsening backslide. Businesses are retrenching, too. That's left companies with bloated inventories of unsold goods, which actually adds to GDP. Some economists think those backlogs weren't as big as the government initially thought in the fourth quarter, which factors into economists' forecasts for a lower GDP reading. Even deeper cutbacks in construction and by businesses in other areas also are expected to play a role weaker forecast. Federal Reserve Chairman Ben Bernanke told Congress earlier this week that the economy is suffering a "severe contraction" and is likely to keep shrinking in the fix six months of this year. But he planted a seed of hope that the recession might end his year if the government managed to prop up the shaky banking system. Even in the best-case scenario that the recession ends this year and an economic recovery happens next year, unemployment is likely to keep rising.

In part, that's because many analysts think don't think the early stages of any recovery will be vigorous and also because companies won't be inclined to ramp up hiring until they feel confident that any economic rebound will have staying power.

The nation's unemployment rate is now at 7.6 per cent, the highest in more than 16 years. The Federal Reserve expects the jobless rate to rise to close to 9 per cent this year, and probably remain above normal levels of around 5 per cent into 2011.