U.S. Real GDP Growth Turns Negative
It gets even worse if you only look at the private sector. Government demand rose from 19.4% to 19.7% of GDP, the highest since the fourth quarter of 1992. Excluding government demand, GDP fell 1.1%.
The outlook for this year looks even worse, as the increase in consumer spending and business investments during the fourth quarter of 2007 were based on large reductions in financial savings and increases in debt. With corporate profits falling the increase in business investments is very much unsustainable, although yesterday's surprisingly strong durable goods orders report indicate that many business executives are still in denial about the state of the economy. Ultimately, the weakening corporate balance sheets and the weakening economic outlook will force them to cut back on investment spending, despite the Fed's agressive rate cuts.
A similar story is true for consumers, whose zero savings rate looks very unhealthy and unsustainable considering the decline in house prices and stock prices. It therefore seems safe to say that the economic contraction will continue during 2008, and probably at an ever faster pace.