US economic growth dives by 6.2% in fastest fall since 1982

US consumers spent far less in the shops in the final months of last year than was first thought, and the country's GDP shrank far more than originally estimated as a result.

The downward revision to fourth-quarter GDP shocked Wall Street, which had been sceptical about the original 3.8 per cent figure when it was published a month ago, but never expected the contraction was deep as 6.2 per cent.

That new figure, published by the Commerce Department yesterday morning, was the worst reading on the US economy in a generation. It has not been lower since 1982, when the Federal Reserve triggered a recession in an attempt to stamp out inflation.

This time, the contraction reflects the aftermath of the financial panic of mid-September, triggered by the collapse of Lehman Brothers, when credit to businesses threatened to dry up and when consumers became increasingly fearful for their jobs.

Consumer spending, originally thought to be down 3.5 per cent, was in fact down 4.3 per cent – a major correction, since consumers account for two-thirds of US GDP. In turn, their increasing caution has left manufacturers racing to cut production to reflect reduced demand, feeding a downward spiral that economists predict will not reverse until at least the middle of this year.

"Economic activity plunged in the fourth quarter, the result of sharp declines in consumer and capital spending on top of a very weak housing market," said Stephen Wood, of Insight Economics. "Although consumer spending will not drop as rapidly in the first quarter, capital spending, residential investment, and inventory investment will likely decline just as faster or even faster."

Recent data has continued to be worse than economists' already gloomy forecasts. This week alone, unemployment has topped 5 million in the US and housing market activity has hit all-time lows. Yesterday, the Institute for Supply Management survey showed business activity contracted in February for a fifth consecutive month, while the University of Michigan consumer sentiment index fell for the first time since November.

The Dow Jones fell 119.2, or 1.7 per cent, to 7,062.9. The S&P 500 shed 2.4 per cent to 735.1, leaving it down 18.6 per cent this year, its worst two-month start on record.

The US government calculates GDP growth as an annualised rate, which takes the quarter-on-quarter change in the size of the economy and multiples it by four. European countries, including the UK, typically publish the raw quarter-on-quarter change.