GDP nosedives 6.3 percent - worst plunge since 1982

Investors may want to view the fourth quarter 2008 gross domestic product report this way: The worst is over. Or, at least it better be, for the good of all involved.

The nation's economy contracted 6.3 percent in Q4 2008 -- its biggest decline in a generation, the U.S. Commerce Department announced Thursday, as every major sector experienced a commercial pullback.

A Bloomberg News survey had expected a decline of 6.3 percent. The U.S. economy contracted 0.5 percent in Q3 2008. In 2008, the world's largest economy grew a scant 1.1 percent -- well below capacity.

Further, the Q4 2008 figure is the U.S. economy's lowest GDP rate since the 6.4 percent plunge in Q1 1982 -- another era that saw a severe recession, the Reagan Recession.

Corporate earnings slide

Meanwhile, in Q4 2008 corporate earnings fell at their fastest pace since 1953, dropping 10.7 percent. For all of 2008, profits fell 10.1 percent -- the biggest decline since 1970.

"It's a pretty dismal result," Michael Gregory, a senior economist at BMO Capital Markets in Toronto told Bloomberg News Thursday. "Given the slight improvement we're seeing in some of the recent indicators, I suspect the first quarter will be a little better than the fourth."

One factor weighing on the economy now, which was not a factor in 2007 before the recession started, concerns world trade, which has slowed substantially. The World Trade Organization now expects global trade to decline nine percent in 2009, the biggest decline since World War II; industrial production may fall as much as 15 percent. In Q4 2008, U.S. exports plunged 23.6 percent -- that category's biggest decline since 1971.

In Q4 2008, private business inventories declined $25.8 billion, compared to the previously announced $19.9 billion drop, as business responded to the fall in demand by decreasing production. Meanwhile, business investment plummeted 21.7 percent, and residential investment plunged 22.8 percent. Consumer spending dropped 4.3 percent.

Economic Analysis: U.S. stock markets should interpret the above report as "it could have been worse," which should help sustain the market rally. These days, any major economic data point that's not a disaster is interpreted as a small victory, and an in-line quarterly GDP report qualifies.

That said, investors should expect the recession, which began in December 2007, to continue at least through Q3, and most likely to the end of 2009. The reason? Consumer spending, which accounts for 60-65 percent of the U.S. economy, shows little sign of rebounding. The best case scenario would involve the U.S. economy starting to recover in late Q3 or early Q4.

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