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Economic output in the United States shrank more than feared during the last quarter of 2008, raising new questions on the country's path to recovery.

On Friday, the U.S. Commerce Department revised its fourth-quarter gross domestic product reading downward, to a 6.2% drop. At the end of January, the government had initially reported a GDP contraction of 3.8%, but that figure was less severe than the 5.4% annualized contraction Wall Street had been predicting for the last three months of the year. (See "U.S. GDP: Less Ugly Than Feared.")

"It was a really lousy report, but we expected that," said David Wyss, chief economist at Standard and Poor's, "and it can be added to all the other really lousy reports we've had this week." (See "U.S.: Jobless Up, Factory Orders Down, Nobody's Home.")

Most of the revision came from inventories. "There was also a fairly significant downward revision in trade, particularly exports," Wyss said.

Friday's reading was the worst since the 6.4% drop in recorded the first quarter of 1982, when the country was suffering a severe recession. This time around, the U.S. economy has been sucked into a housing, credit and financial conflagration that led to widespread job losses and a massive pullback in spending. (See "Rebuilding Global Markets.")

The government also reported that personal consumption fell by 4.3%, which was also below the 3.7% drop anticipated by Wall Street.

Friday's report added insult to injury for the U.S. markets, which also had to had to also grapple with the news of Citigroup (nyse: C - news - people ) reaching a deal with the U.S. government, in which the Treasury would convert up to $25.0 billion in Citigroup preferred shares to common. (See "Citi Nears Rescue From Uncle Sam.")

U.S. stocks recovered from deep losses in late-morning trading, while the yield on the benchmark 10-year U.S. Treasury note rose to 3.02%, from 2.98% Thursday

* Industrial output drops a record 8.1 percent

* Consumer inflation slows to 1 percent, below forecast

* Economics Minister doubts quantitative easing will work

* Wage data shows job market shrinking

By Hideyuki Sano

TOKYO, Dec 26 (Reuters) - Japan's factories slashed output at a record pace in November in the face of a global economic slump, and core inflation fell faster than forecast, putting the country on course for its second spell of deflation this decade.

With collapsing export orders pummelling manufacturers, the job market is shrinking, threatening to crush consumption and depress prices barely six months after the narrowest measure of consumer inflation popped above zero.