The U.S. economy shrank less than forecast in the fourth quarter as a collapse in spending led to a buildup in inventories that will cause companies to retrench even more in the early part of this year. Gross domestic product contracted at a 3.8 percent annual pace from October through December, the most since 1982, the Commerce Department said today in Washington. A gain in stockpiles contributed 1.3 percentage points to growth, partially compensating for a back-to-back drop in consumer spending. Prices also retreated. The economy is likely to contract further in the first three months of this year as retailers and manufacturers, from Starbucks Corp. to Boeing Co., this week announced plans to slash payrolls and cut production to get rid of unwanted stocks. Today's report will maintain the pressure on President Barack Obama to win quick congressional approval of a fiscal stimulus package. ``We're in the middle of a sharp contraction in the economy,'' Dean Maki, co-head of economic research at Barclays Capital Inc. in New York, said before the report. ``Businesses are cutting spending in all areas, whether it's employees or investment spending.'' GDP was forecast to contract at a 5.5 percent annual pace last quarter, according to the median estimate of 79 economists surveyed by Bloomberg News. Projections ranged from declines of 3 percent to 7 percent. The world's largest economy shrank at a 0.5 percent annual rate from July through September. The back-to-back contraction is the first since 1991. 2008 Growth For all of 2008, the economy expanded 1.3 percent as a boost from exports and government tax rebates in the first half of the year helped offset the deepening spending slump. Congress is considering a two-year fiscal stimulus package supported by Obama. House lawmakers this week passed the $819 billion measure. The GDP price gauge dropped at a 0.1 percent annual pace in the fourth quarter, the most since 1954, reflecting the slump in commodity prices. The Federal Reserve's preferred measure, linked to consumer spending and excluding food and fuel, rose at a 0.6 percent pace, the least since 1962. Unadjusted for inflation, GDP shrank at a 4.1 percent pace, the most since the first three months of 1958. The drop in so- called nominal growth explains why corporate profits slumped as the year ended. ``This is a severe, steep, broadly-based recession'' with ``no quick fix,'' Stephen Roach, chairman of Morgan Stanley Asia Ltd., said in a Bloomberg Television interview from Davos, Switzerland today. Spending Slump Consumer spending, which accounts for more than two-thirds of the U.S. economy, dropped at a 3.5 percent annual rate last quarter following a 3.8 percent drop the previous three months. It's the first time purchases declined by more than 3 percent in consecutive quarters since records began in 1947. Americans may pull back further as employers slash payrolls. Companies cut 524,000 workers in December, bringing total job cuts for last year to almost 2.6 million. More cutbacks are on the way. Eastman Kodak Co., Target Corp. and Texas Instruments Inc. are among U.S. companies that announced thousands of layoffs this week. Target, the second-biggest U.S. discount retailer, said this week it will slash 600 existing jobs and 400 open positions, mainly in its hometown of Minneapolis. It also said it will close a distribution center in Little Rock, Arkansas, later this year that employs 500 workers. `Unprecedented' Environment ``We are clearly operating in an unprecedented economic environment that requires us to make some extremely difficult decisions,'' Chief Executive Officer Gregg Steinhafel said in a Jan. 27 statement. The economic slump intensified last quarter as companies also retrenched. Business investment dropped at a 19 percent pace, the most since 1975. Purchases of equipment and software dropped at a 28 percent pace, the most in a half century. The slump in home construction also accelerated, contracting at a 24 percent pace last quarter after a 16 percent drop in the previous three months. PPG Industries Inc., the world's second-biggest paint maker, said this week that it may cut as many as 4,500 employees, or 10 percent of its workforce, because of weak global demand from automakers and homebuilders. Global Slump ``We are probably looking at the sharpest downturn that anyone working at our company has seen,'' Chief Executive Officer Charles E. Bunch said in an interview Jan. 27. ``The regions outside of North America, which had been really helping PPG in the first three quarters of last year, have sort of caught the disease that started here in the U.S. with the credit crisis.'' The slowdown in global demand indicates American exports are unlikely to contribute less to growth in early 2009. World growth will be 0.5 percent this year, the weakest postwar pace, the International Monetary Fund said Jan. 28. Inventories grew at a $6.2 billion pace in the fourth quarter, the first gain in more than a year. It's contribution to growth was the biggest since the fourth quarter of 2005. The Fed this week said it's prepared to purchase Treasury securities to shore up lending and warned inflation may recede too rapidly. Fed policy makers voted to leave the benchmark interest rate as low as zero. The GDP report is the first for the quarter and will be revised in February and March as more information becomes available.

Source