Economy contracts as consumers retreat
WASHINGTON (Reuters) - The U.S. economy suffered its sharpest contraction in seven years in the third quarter as consumers cut spending and businesses reduced investment at the onset of what may be a severe and long-lasting recession.
The Commerce Department said on Thursday that U.S. gross domestic product shrank at a 0.3 percent annual rate as the sharpest pullback by consumers since 1980 overwhelmed an increase in government spending.
"This is just the beginning of contraction," said Sung Won Sohn, an economics professor at California State University, who said the fourth quarter will certainly show another decline, which would meet the traditional definition of recession, or back-to-back quarters of falling activity.
A drop in GDP had been widely expected and the decline was not as great as feared, easing the angst of investors who bid U.S. stocks up on hopes interest-rate cuts by central banks around the globe can ward off a deep downturn.
U.S. voters go to the polls on Tuesday to elect the next president, and a run of gloomy economic news has given Democratic candidate Sen. Barack Obama an edge over Republican rival Sen. John McCain in the polls.
While the White House conceded the economy had "weakened substantially," it insisted measures it has initiated, like a plan to buy troubled mortgage assets from banks, should help ease credit-market woes, which have cast a cloud worldwide.
Paul Ashworth, senior U.S. economist for London-based Capital Economics Ltd, said he now expects the U.S. economy to shrink 1.5 percent next year, with no growth in 2010.
"Overall, we expect the level of GDP to shrink by a total of 2.5 percent, which would make this one of the worst recessions since the Great Depression," Ashworth said.
CONSUMER FALTERS
Speaking in Florida, Obama said McCain would continue the policies of President George W. Bush, which had landed the economy in trouble. "George Bush has dug a deep hole for us and he wants to hand the shovel to John McCain," he said.
McCain adviser Carly Fiorina said the data was no surprise and the Republican candidate had the right economic prescription. "I think that people have been expecting it now that we would be going into a recession for some time," she told reporters in Ohio, adding that lower capital gains taxes and investment incentives were needed to spur job creation.
The third-quarter contraction was a striking turnaround from the second quarter's relatively brisk growth rate of 2.8 percent, a pace supported by a shot of government stimulus.
Consumer spending, which fuels two-thirds of U.S. economic activity, fell at a 3.1 percent rate in the third quarter -- the first drop since the closing quarter of 1991. Spending on nondurable goods -- items like food and paper products -- shrank at the sharpest rate since late 1950.
Heavy government spending, still-strong export growth and a slower pace of inventory liquidation helped mask the extent of deterioration in other sectors.
"The bad news is the private sector was doing really badly," said Nigel Gault, chief U.S. economist at Global Insight in Lexington, Massachusetts. "Consumer spending, equipment and software, residential -- the whole private side was very weak." Continued...
