Economy: Sharpest Decline in 26 Years

NEW YORK (CNNMoney.com) -- The U.S. economy suffered its biggest slowdown in 26 years in the last three months of 2008, according to the government's first reading about the fourth quarter released Friday.

Gross domestic product, the broadest measure of the nation's economic activity, fell at an annual rate of 3.8% in the fourth quarter, adjusted for inflation.

That's the largest drop in GDP since the first quarter of 1982, when the economy suffered a 6.4% decline.

Still, the decline was less than the 5.5% drop forecast by economists surveyed by Briefing.com. The fourth quarter plunge followed a more modest decline of 0.5% in the third quarter.

Hit by tight credit and soaring job losses, Americans slammed the brakes on spending in the quarter.

Consumer spending fell at a 3.5% annual rate, with spending on big-ticket durable goods plunging at a 22% pace. Consumer spending accounts for more than two-thirds of overall economic activity.

But it wasn't just consumers pulling back. Fixed investment in equipment and software, taken as an indication of business spending, plunged at an annual 28% rate. And consumers and businesses outside the United States also had less demand for U.S. goods, as exports fell at nearly a 20% annual rate.

The report comes as the Senate prepares for a vote on an economic stimulus package that is designed to pump more than $800 billion into the economy. The House passed the measure on a party-line vote Wednesday.