leading to the biggest plunge in corporate earnings in a half century and underscoring why companies are slashing payrolls this year.

TO BE NOTED: From Bloomberg:

"U.S. Economy Contracts 6.3%, Profits Decline 16.5% (Update2)

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By Shobhana Chandra

March 26 (Bloomberg) -- The U.S. economy shrank in the fourth quarter more than previously estimated, leading to the biggest plunge in corporate earnings in a half century and underscoring why companies are slashing payrolls this year.

Gross domestic product contracted at a 6.3 percent annual rate from October to December, the weakest since 1982, the Commerce Department said today in Washington. Profits dropped 16.5 percent from the prior quarter, the most since 1953.

Another report showed the number of people collecting jobless benefits this month reached a record 5.56 million as firings mounted. Still, recent reports showing a rebound in sales indicate last quarter’s slump may give way to smaller declines in growth. A let-up in the recession would set the stage for President Barack Obama’s stimulus plan and Federal Reserve measures to take hold in the second half.

“It’s a pretty dismal result,” said Michael Gregory, a senior economist at BMO Capital Markets in Toronto. “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.”

Initial claims for jobless benefits last week rose 8,000 to 652,000, topping 600,000 for an eighth straight time, the Labor Department reported. Total benefit rolls jumped by 122,000 in the week ended March 14, from 5.44 million the previous week, as job cuts spread from manufacturers and construction companies to services such as government agencies and health-care providers.

Futures Up

Stock-index futures held earlier gains following the reports on speculation the economy may be past the worst of the downturn. Futures on the Standard & Poor’s 500 index were up 1.2 percent at 817.5 at 9:21 a.m. in New York. Treasuries were little changed.

The drop in GDP, the sum of all goods and services produced, was larger than the 6.2 percent decline estimated by the Commerce Department last month. The median forecast of 69 economists in the Bloomberg survey called for a 6.6 percent decrease, and estimates ranged from declines of 7.1 percent to 6 percent.

This is the final of three estimates the government issues on economic growth. The world’s largest economy shrank at a 0.5 percent annual rate from July through September.

Annual Gain

For all of 2008, the economy grew 1.1 percent, the same as previously estimated, as exports and government tax rebates in the first six months helped offset the slump in consumer spending that followed.

Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, fell by $250.3 billion from the third quarter, the biggest decrease since records began in 1947.

For all of last year, profits were down 10.1 percent, the biggest annual drop since 1970.

Consumer spending, which accounts for about 70 percent of the economy, fell at a 4.3 percent pace last quarter, marking the first back-to-back decreases in excess of 3 percent since record-keeping began in 1947.

Retailers are doing better so far this year. Sales fell less than forecast in February and January’s 1.8 percent gain was the biggest in three years, Commerce reported earlier this month.

Slowdown Moderating

Other drags on growth are also moderating. Builders broke ground on 22 percent more homes in February than in the previous month and sales of new and previously owned houses also increased, erasing some of the gloom surrounding the market.

A bigger reduction in inventories than previously estimated accounted for most of the GDP revision. Companies cut stockpiles at a $25.8 billion annual rate, compared with a previous estimate of $19.9 billion.

Fewer goods on hand lay the foundation for growth in 2009 as manufacturers gear up to meet any improvement in demand.

Inventories of long-lasting factory goods fell 0.9 percent in February after dropping 1.1 percent in January, the biggest two-month slide since 2003, Commerce figures showed yesterday. The decrease brought the ratio of inventories to sales down for the first time in seven months.

“Inventories are getting low enough in some sectors that stocks might need to be replenished,” said David Resler, chief economist at Nomura Securities International Inc. in New York. “It’s encouraging news that the economy may be starting to turn around a bit.”

Trade Slump

While smaller stockpiles may benefit manufacturers, a collapse in world trade is becoming a major headwind.

The World Trade Organization this week predicted global trade will decline by 9 percent this year, the most since World War II. Worldwide industrial production this year may fall by as much as 15 percent and the global economy is likely to shrink for the first time since World War II, the World Bank said on March 9.

Stepped-up efforts by the Obama administration and the Fed may gain more traction later this year as the economy improves.

“The stimulus may keep the recession from getting a lot deeper,” Patrick Newport, an economist at IHS Global Insight Inc. in Lexington, Massachusetts, said before the report. “It’s good news that consumer spending isn’t dropping as much now as before. We worked off some of the inventory so we don’t have to cut down as much.”

Carmakers are counting on the policy measures for survival.

General Motors Corp. Chief Executive Officer Rick Wagoner last week said a $5 billion rescue package for auto-parts suppliers and a proposal to provide consumer car-buying incentives may spark a revival of the U.S. auto market.

“It does feel like, absent some other financial catastrophe, we’re bumping along the bottom,” Wagoner said in an interview on March 19 from his Detroit office. “What I can’t tell you is, when we may begin to see, in this baseline case, a slow resumption.”

To contact the report on this story: Shobhana Chandra in Washington schandra1@bloomberg.net

Last Updated: March 26, 2009 09:27 EDT "