The latest reading on the gross domestic product, released Wednesday by the Commerce Department, showed that the economy was in a considerably weaker state than the government first estimated, when it said the expansion in the last three months of 2006 was at a 3.5 percent pace. The principle reason for this was that businesses tightened their belts amid fallout from the troubled housing and automotive sectors.
The disappointing news followed. The Dow fell 546.02, or 4.3 percent, to 12,086.06 before recovering some ground in the last hour of trading to close down 416.02, or 3.29 percent, at 12,216.24.
The new GDP figure for the October-to-December quarter was a tad slower than the 2.3 percent growth rate economists were forecasting and clearly less sunny than that original estimate. The GDP, which measures the value of all goods and services produced within the United States, is the best overall barometer of economic health.
Although the fourth quarter's showing marked a slight improvement from the third quarter's mediocre 2 percent growth rate, it didn't alter the overall picture that economic activity in both quarters was restrained by the housing slump and the ailing automotive sector.
Investment in home building in the fourth quarter was slashed at a 19.1 percent pace, the steepest decline in 15 years.
The downgrading of the fourth-quarter GDP estimate meant that the economy for all of 2006 ended up growing by 3.3 percent, down slightly from 3.4 percent first estimated. Even so, the new figure still marked the best annual performance in two years.
Business retrenchment was a key factor behind the lower GDP estimate for the fourth quarter. Businesses, worried that extra supplies of goods might get out of whack with customer demand, ended up investing much less than previously thought in their inventories. That shaved 1.35 percentage points off fourth-quarter GDP, the most in 1 1/2 years.
Companies also ended up cutting back on other spending and investment in the fourth quarter, including equipment and software and new plants and other commercial buildings.
Consumers, a major force shaping overall economic activity, boosted spending at a 4.2 percent pace in the final quarter of last year. That was brisk — and up considerably from a 2.8 percent pace in the prior quarter. But it also was slightly less than the 4.4 percent growth rate first estimated for the final quarter of last year. That also played a role in the GDP downgrade in the fourth quarter.
Such a big revision in fourth quarter GDP — to a 2.2 percent pace from the initial 3.5 percent pace — was unusual. The government said the average revision is much smaller — 0.5 percentage point. "A revision of 1.3 percentage points or larger has occurred only seven times in 30 years," it said.
The anxiety in the stock market came as investors fretted that the U.S. and Chinese economies may be stumbling. Their anxiety was partly stoked by an earlier warning from ex-Federal Reserve Chairman Alan Greenspan that it was possible the U.S. economy could slide into a recession this year.
Many economists say the odds of that happening are low. The biggest risk to short-circuiting the expansion, which started in late 2001, is a worse than expected housing slump.