The economy contracted at a staggering 6.2% annual pace at the end of 2008, the worst showing in a quarter-century, as consumers and businesses ratcheted back spending, plunging the country deeper into recession.
The Commerce Department report released Friday showed the gross domestic product sinking much faster than the 3.8% annualized drop for the October-December quarter first estimated last month. It also was considerably weaker than the 5.4% annualized decline economists expected.
GDP is the value of all goods and services produced in the United States and is the best barometer of the country's economic health.
A much sharper cutback in consumer spending — which accounts for about two-thirds of economic activity — along with a bigger drop in U.S. exports sales, and reductions in business spending and inventories all contributed to the large downgrade.
Looking ahead, economists predict consumers and businesses will keep cutting back spending, making the first six months of this year especially rocky.
"Right now we're in the period of maximum recession stress, where the big cuts are being made," said economist Ken Mayland, president of ClearView Economics.
The report offered grim proof that the economy's economic tailspin accelerated in the fourth quarter under a slew of negative forces feeding on each other. The economy started off 2008 on feeble footing, picked up a bit of speed in the spring and then contracted at an annualized rate of 0.5% in the third quarter.
The faster downhill slide in the final quarter of last year came as the financial crisis intensified.
Consumers at the end of the year slashed spending by the most in 28 years. They chopped spending on cars, furniture, appliances, clothes and other things. Businesses retrenched sharply, too, dropping the ax on equipment and software, home building and commercial construction.
Before Friday's report was released, many economists were projecting an annualized drop of 5% in the current January-March quarter. However, given the fourth quarter's showing and the dismal state of the jobs market, Mayland believes a decline of closer to 6% in the current quarter is possible.
The nation's unemployment rate is now at 7.6%, the highest in more than 16 years. The Federal Reserve expects the jobless rate to rise to close to 9% this year, and probably remain above normal levels of around 5% into 2011.
A smaller decline in the economy is expected for the second quarter of this year. But the new GDP figure — like the old one — marked the weakest quarterly showing since an annualized drop of 6.4% in the first quarter of 1982, when the country was suffering through an intense recession.
"It's going to be a challenging 2009," Scott Davis, chief executive officer of global shipping giant UPS, said Thursday while speaking at the U.S. Chamber of Commerce in Washington.
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.
A private report Friday showed that consumer confidence fell to a three-month low in February on expectations that the recession would grind on throughout this year and the jobless rate would keep rising.
The Reuters/University of Michigan Surveys of Consumers said its final index reading of confidence for February fell to 56.3 from 61.2 in January. That was marginally higher than the preliminary result of 56.2 announced earlier this month but was the lowest final reading since 55.3 in November 2008.
It's creating a self-perpetuating vicious cycle that Washington policymakers are finding hard to break.
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.
For all of 2008, the economy grew by just 1.1%, weaker than the government initially estimated. That was down from a 2% gain in 2007 and marked the slowest growth since the last recession in 2001.
With Friday's figures, Mayland lowered his forecast for this year to show a deeper contraction of just over 2%.
In the fourth quarter, consumers cut spending at a 4.3% pace. That was deeper than the initial 3.5% annualized drop and marked the biggest decline since the second quarter of 1980.
Businesses slashed spending on equipment and software at an annualized pace of 28.8% in the final quarter of last year. That also was deeper than first reported and was the worst showing since the first quarter of 1958.
Fallout from the housing collapse spread to other areas. Builders cut spending on commercial construction projects by 21.1%, the most since the first quarter of 1975. Home builders slashed spending at a 22.2% pace, the most since the start of 2008.
A sharper drop in U.S. exports also factored into the weaker fourth-quarter performance. Economic troubles overseas are sapping demand for domestic goods and services.
Businesses also cut investments in inventories — as they scrambled to reduce stocks in the face of dwindling customer demand — another factor contributing to the weaker fourth-quarter reading. The government last month thought businesses had boosted inventories, which added to gross domestic product, or GDP.
Fed Chairman Ben Bernanke earlier this week told Congress that the economy is suffering a "severe contraction" and is likely to keep shrinking in the first 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.
That's partly because many analysts don't think the early stages of any recovery will be vigorous, and because companies won't be inclined to ramp up hiring until they feel confident that any economic rebound will have staying power.
AP Business Writer Harry Weber in Atlanta contributed to this report, Reuters.