Biggest hit as GDP falls: American exports

US output fell 3.8 percent at the end of 2008, but exports slid at a 20 percent rate.

If you wonder why the machinery maker Caterpillar is laying off more than 20,000 workers, the answer comes through loud and clear in the latest numbers on America's economy.

As the nation's production of goods and services fell at a 3.8 percent annual pace in the final quarter of 2008, one of the steepest parts of the slide was in exports.

The global economic downturn means that Caterpillar, which not many months ago was one of corporate America's big stories of industrial success, is selling a lot fewer excavators and pipe layers.

For years, US exports grew faster than other parts of the gross domestic product (GDP). But in the most recent quarter, exports fell much faster than the rest of the economy, declining at a 20 percent annual pace.

It's a sign of how a recession that began with trouble in American mortgages has gone global, and now that global impact is bouncing back at the US.

"We're in the grips of a simultaneous global downturn," John Lipsky of the International Monetary Fund told world leaders assembled in Davos, Switzerland, Saturday.

The IMF has revised its outlook for the world economy downward, with many nations facing even harder times than the United States. It now expects GDP to decline for the year by 1.6 percent in the US, 2 percent in the European Union, and 2.6 percent in Japan.

Disruptions in credit markets are hurting not just household spending but also the ability of companies to produce and ship goods, the IMF said in its new forecast.

Help for the middle class

President Obama focused on the economy's troubles on Friday, when the American GDP numbers came out, and in his radio address Saturday. First, he unveiled a task force to focus on strengthening the middle class and urged quick passage of his economic stimulus plan.

He also said the economy needs more than just more jobs, it needs better ones that offer average Americans "a way forward and a way up."

In his radio address, Mr. Obama said that a plan to fix credit markets is on the way – one that will lower mortgage costs and offer job-creating loans for small businesses. He also pledged tighter controls and oversight of how banks spend any rescue money they receive from taxpayers.

Obama also sought to prepare Americans for a slow recovery from the current slump. "No one bill, no matter how comprehensive, can cure what ails our economy," he said.

Global impact

The challenge is magnified by the global scope of the downturn.

Not long ago, the world economy overall was enjoying its fastest growth in modern times. The expansion of trade has meant expanding productivity rates and jobs, allowing most nations to grow faster than they could without such ties.

But many nations relied on US consumer spending as an engine of growth. Now, as American households retrench, there is suddenly less momentum for growth abroad as well as at home. In the long run, economists say other nations must strengthen their domestic consumption to create a more balanced world economy. But that transition may not happen quickly, even if other governments join the US in fiscal stimulus efforts to counter the recession.

Global trade plummeted in the fourth quarter of last year. Those US consumers cut their demand for imports at a 16 percent annual pace.

"A lot of the burden of the US slowdown is being borne by foreign producers," says Ken Mayland, president of ClearView Economics near Cleveland. But the parallel drop in US exports represents a "huge decline in what has been the fastest growing sector of our economy."

On Friday, Caterpillar announced it plans to cut another 2,100 jobs, on top of some 20,000 layoffs announced earlier last week. The company has 113,000 employees worldwide.

Some economists worry that the recession could cause nations to focus more on self-interest with the risk that measures designed to protect domestic jobs could backfire by deepening the global downturn.

So far, this remains more a risk than a reality. The danger is that modest actions could end up provoking larger ones. Washington's stimulus measure, for example, may include a "buy American" provision designed to focus demand on products largely made in the US.

The delicate US-China relationship faces new tension. As a presidential candidate, Obama pledged to take a tougher line on trade issues with China.

Officials in Beijing weren't pleased when US Treasury Secretary Timothy Geithner told senators at his confirmation hearing that China was manipulating its currency.

Vice President Joe Biden said on Thursday that the Obama administration had made no determination on whether China was manipulating its currency and would not make a unilateral attempt to block its exports.

In a phone call Friday, Chinese President Hu Jintao told Obama that he wanted to strengthen cooperation between the two countries to fight the global economic slowdown, China's Xinhua news agency reported.

Some economists say that it's legitimate for the US to work harder to end abuses of current trade law, with China topping the list of alleged offenders. But most economists also warn that a recession is a risky time for trade relations to fray. In the Great Depression, rising trade barriers deepened the downturn.

• Wire service material was used in this report.