Fourth quarter marks worst performance for U.S. economy in nearly 29 years The U.S. economy contracted at a 3.8% annualized rate in the fourth quarter, Commerce Department data showed Friday -- a decline that would have been worse except that the government counts an unwanted buildup of goods on store shelves as growth. A clearer picture of the scope emerges if the inventory buildup's excluded. As adjusted, gross domestic product contracted at a 5.1% pace in the final three months of 2008, the weakest in 28 years. Even with inventories, the growth rate is the worst since 1982. By comparison, GDP fell just 0.5% in last year's third quarter. Friday's report also confirms that the economy has entered new territory with a stunning record drop in headline inflation. The drop in growth in the fourth quarter compared against economists' expectations that GDP would shrink at a 5.5% annual rate. See Economic Calendar. By the same token, the data cast a negative light over prospects for the current quarter since output is likely to be cut aggressively. So despite the less-than-feared headline, the report may be bearish Wall Street. The economic weakness in the fourth quarter was widespread. Read full government report. Notably, 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. The economy has grown just 1.3% in the past year, the weakest growth rate since 2001. 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. Consumer spending, considered an engine of economic growth, fell 3.5% in the fourth quarter, as opposed to a 3.8% drop in the third quarter. There was a sea-change in the inflation picture. The core price index, adjusted to exclude food and energy, retreated to a 0.6% annual rate in the fourth quarter from 2.4% in the prior three months, leaving the annual rate at 2.2% growth. But headline consumer inflation fell at a 5.5% annual rate, the biggest drop on record. In light of the drop in inflation, real disposable income rose 3.3% on an annualized basis in the fourth quarter, a reversal after falling 8.8% in the third quarter. The fourth-quarter savings rate clocked in at 2.9%, up from 1.2% in the third quarter. Details Consumer spending fell 3.5%, including a 22.4% drop in durable goods and a 7.1% drop in nondurable goods, the biggest drop since 1950. Spending on services rose 1.7%. Business investment fell 20.1% in the fourth quarter, subtracting 2.3 percentage points from growth. This marked the largest drop since 1980. Investments in equipment and software dropped 27.8%, the weakest in 50 years. Investments in structures fell 19.1%, the largest decline since the first quarter of 1975. The nation's exports fell 19.7% in the fourth quarter, while imports, which are a subtraction from the calculation of GDP, fell 15.7%. As a result, the narrowing trade deficit added 0.09 percentage point to growth. Government spending increased 1.9% after having risen 5.8% in the third quarter. Federal spending rose 5.8%. Defense spending rose 2.1% in the fourth quarter. Non-defense spending rose 14.1%. Meanwhile, spending by state and local governments fell 0.5%. In all, government spending contributed 0.4 of a percentage point to growth. Businesses added $6.2 billion to their inventories, on the heels of having cutting them by $29.6 billion in the third quarter. The change in inventories added 1.32 percentage points to growth. Residential investment fell 23.6% in the fourth quarter, and thus has declined in each quarter for the past three years. Investment in residences subtracted 0.85 of percentage point from the fourth quarter's GDP growth, compared with 0.60 of point from third quarter growth. In a separate report Friday, the Labor Department said employment costs rose at the slowest pace since the 1980s.

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