GDP contraction deeper than first thought

By Glenn Somerville

WASHINGTON (Reuters) - The economy shrank more severely during the third quarter than first estimated as consumers cut spending at the steepest rate in 28 years, according to a Commerce Department report on Tuesday that underlined how rapidly activity was slowing.

Corporate profits fell for a second straight quarter and business investment fell, the department said as it revised the annual rate of decline in third-quarter gross domestic product to 0.5 percent from the 0.3 percent that it reported a month ago. It was the sharpest fall in GDP since the third quarter of 2001 when the terror attacks against the United States took place.

Many analysts believe the United States already has joined Europe in recession, though it will take another quarter of contraction to meet a widely used definition for it -- back-to-back quarters of declining output. The third-quarter decline was a striking contrast with the second quarter's relatively brisk 2.8 percent rate of growth.

"I think it anchors the beginning of the U.S. technical recession," said Michael Woolfolk, senior currency strategist with Bank of New York-Mellon in New York. "It's likely to get worse before it gets better."

The U.S. decline is widely predicted to accelerate in the fourth quarter and last into 2009.

Prices for U.S. Treasury debt securities rose after the GDP report was issued as investors apparently sought safety, while the dollar was weaker.

Continuing job losses, a severe credit crunch, falling home prices and a wobbling stock market have put consumers under severe stress. Consumer spending that fuels two-thirds of U.S. economic activity fell at a 3.7 percent rate in the third quarter rather than 3.1 percent as previously estimated -- the sharpest rate of decline since the second quarter of 1980.

Spending on durable goods like new cars and home appliances that are intended to last three years or more plummeted at a 15.2 percent rate instead of 14.1 percent as previously estimated, the steepest fall since the start of 1987.

The revised GDP report offered a first look at corporate profits during the third quarter and, not surprisingly, they were down. Profits dropped at a 0.4 percent rate after falling 5.4 percent in the second quarter, the department said.

Business investment fell at a revised 1.5 percent rate in the third quarter rather than 1 percent as previously estimated. It was the first reduction in business investment since the end of 2006 and signals that companies are wary about prospects for future sales.

Prices rose during the third quarter, with a gauge based on personal expenditures rising 2.6 percent, excluding volatile food and energy costs, down from the 2.9 percent increase estimated a month ago but ahead of the second quarter's 2.2 percent rise.

But with the economy contracting, prices are expected to come under pressure, and deflation has emerged as a bigger concern than inflation.

(Additional reporting by Wanfeng Zhou in New York, Editing by Andrea Ricci)