Who shrank the economy? Food prices dent U.S. growth

WASHINGTON (Reuters) - Inflation ate deeply into U.S. consumer spending in the third quarter, doing more harm to the economy than either slumping car sales or housing, but recent commodity price falls may support growth going forward.

This does not mean that the U.S. economy is stronger than it looks. The gross domestic product shrank by 0.3 percent between July and September, according to annualized data released on Thursday, and many economists predict a recession lasting until mid-2009.

Consumer spending suffered its biggest pullback in the third quarter since 1980. But the subsequent decline in prices for food and gas could support growth in the fourth quarter, provided households can shrug off worry over job security and restore their spending.

"That is about the only area of the economy where you can look and say the outlook in the immediate future is brighter," said Nigel Gault, chief U.S. economist at Global Insight in Lexington, Massachusetts.

"Consumers will have more spending power out of their incomes. It is just that they may not want to spend because they are scared of losing their jobs...and can't get credit so may be unable to spend as much as they'd like," he said.

Details from the Commerce Department report show that real spending on food subtracted 0.89 percent from GDP, adjusted for an annualized food expenditures deflator of 8.5 percent.

"Without this the drop, GDP may have been positive," said Harm Bandholz, an economist at UniCredit in New York, who calculated that food spending took its second largest bite out of growth since the 1950s.

To put this in context, the collapse in U.S. car sales deducted 0.80 percent from third-quarter GDP while housing, the catalyst for the global credit crisis that chilled growth in the first place, subtracted 0.72 percent.

Food prices certainly jumped in the third quarter, with staples like bread and rice increasing by over 15 and 42 percent respectively in September alone.

U.S. consumer prices rose by 4.9 percent year-over-year in September from a 5.6 percent peak in July, and inflation is expected to continue to slow after commodity prices buckled, including a collapse in the cost of crude oil.

Morgan Stanley calculates that the slide in U.S. gasoline prices from a peak of $4 a gallon in July to under $3 will have the same impact as a tax cut worth $150 billion.

That benefit has yet to be felt. Spending by American households, which previously had been raising their spending to keep putting the same food on the table, buckled in the third quarter. As a result, nominal spending on food showed an actual decline.

"Food is a big component of expenditures, and one of the ways people cut back on spending was to substitute away from more expensive food items," said James Hamilton, an economics professor at the University of California at San Diego.

"I think it's accurate to read this first as a broad effort by consumers to cut back where they can," he said.

(Editing by Leslie Adler)