The nation's economy contracted at a 2.1 percent annual rate during the last three months of 1990, the first decline since 1986, the Commerce Department said yesterday.
In its first estimate of the gross national product for the last three months of 1990, Commerce said the nation's economic output fell as consumers spent less and individuals and businesses pared back their investments. The auto industry was the worst hit sector of the economy, as sales of trucks and cars dropped.
The report confirmed what many businesses and consumers have known for some time: The plunge in consumer confidence that followed the Iraqi invasion of Kuwait on Aug. 2 worsened an economic slowdown that had started earlier last year.
Government and private economists expect at least one more quarter of contraction before the economy turns around and the length and intensity of the gulf conflict has introduced an element of uncertainty in their forecasts.
The economic downturn already has taken a toll on many companies and banking institutions and hastened the demise of some that were already troubled before the slump. Yesterday, Arlington-based USAir reported a record quarterly loss of $221 million. Federal thrift regulators, meanwhile, took over two large savings and loans: Trust Bank of Tysons Corner and Columbia Savings & Loan of Beverly Hills, Calif. (Details Page C1.)
Even though the GNP began to decline in the fourth quarter, the drop was more modest than many economists expected and the relatively lean level of inventories -- the unsold stocks held by businesses -- encouraged many economists who believe a recession will be short. Business inventories fell by $16.3 billion in the final three months of the year.
Michael Darby, the Commerce Department's undersecretary of economic affairs, said "the numbers make me more optimistic. ... It is hard to have a big recession without an inventory problem." He said the report bolstered his belief the recession would "hit bottom" in the first three months this year. "That's our anticipation. We expect to see a small positive in the second quarter," he said.
Princeton University economist Alan Blinder said the decline in output was "much better than anyone thought it would be. Things didn't slide downhill in the last quarter as steeply as people thought."
But other economists were cautious. Richard B. Hoey, managing director and chief economist of Barclays de Zoete Wedd Inc., the investment banking arm of Barclays Bank PLC, said the first GNP estimates are often revised later, especially when the Commerce Department is trying to estimate a rapidly changing economy.
Hoey said that the estimate bolstered his view that "we'll have a recession that will run about three quarters and we're right about in the middle of the recession right now." He added that the estimate suggested that "in terms of decline in real GNP, it will be a normal recession and not something worse than that."
Another reason for caution, economists said, was that the length and cost of the war against Iraq remains uncertain. Darby said that the Persian Gulf situation will remain at "center stage" of the economy.
In addition to hurting consumer confidence, the Persian Gulf crisis increased oil prices and drained money out of the economy that might have gone to other consumer spending. Military spending, however, had little effect on the economy in the fourth quarter. Government spending for the military increased at a 15 percent annual rate during the fourth quarter because of the deployment of troops to the region. But the effect of the increase in government spending was relatively small because most of the military purchases were made overseas and thus boosted imports rather than domestic production.
The economic figures were bolstered by a $15 billion drop in imports of crude oil and petroleum products. That accounted for most of a $23 billion improvement in net exports. But the biggest drag on the economy was the plunge in personal consumption. Consumer spending declined at an annual rate of $21 billion, or 3.1 percent, during the fourth quarter. Businesses reacted by cutting back, which could augur well for recovery. Usually, a recession brings a rise in inventories. Selling those inventories can later slow the impact of a recovery on the nation's manufacturers.