"Harsh storm" threatens global economy

By Burton Frierson and Christian Plumb

NEW YORK (Reuters) - The U.S. economy contracted in the third quarter as the financial crisis raged, while Japan and Germany said they would spend billions of dollars to provide a cushion against a deep global recession.

The spending measures would complement a series of interest rates cuts, including those from China, Norway and the United States on Wednesday.

Japan may cut rates on Friday and the European Central Bank, Britain and Australia are expected to follow next week, coming on the heels of data that showed a rapid deterioration in major economies.

"A harsh storm seen only once in 100 years is raging," Japanese Prime Minister Taro Aso told a news conference.

The president of the San Francisco Federal Reserve Bank, Janet Yellen, called recent trends in the U.S. economy "deeply worrisome."

The first Fed official to speak after Thursday's news that the U.S. economy contracted in the third quarter, Yellen said the U.S. federal funds rate could potentially go "a little lower" than 1 percent, one day after the Fed cut its benchmark lending rate by a half percentage point.

"The mortgage meltdown is far from over, the economy and financial markets are still reeling from it," she said.

The world's largest economy shrank at a 0.3 percent annual rate in the third quarter, the sharpest contraction in the United States in seven years. U.S. consumers slashed spending at the sharpest rate in 28 years in the third quarter, undermining growth.

CREDIT MARKETS THAW

The economy also suffered in the third quarter as businesses cut investment. More companies announced payroll cuts on Thursday. Credit card issuer American Express Co said it would chop 7,000 jobs, while cellular phone maker Motorola Inc said it would lay off 3,000 workers.

However, the data on the gross domestic product was not as bad as many had feared, which along with the global rate cuts and signs of a thaw in credit markets helped push U.S. stocks up about 2 percent.

The gains brought stability to a market that had fallen to 5-1/2-year lows this month, ravaged by the credit turmoil. U.S. stocks are still down about 15 percent just this month.

European shares lost much of their earlier gains but still closed higher.

Japan's benchmark Nikkei average index closed up 10 percent, a third straight day of gains that have lifted the index 26 percent. However, like most markets in the world, the Nikkei remains down more than 40 percent this year.

Even as the markets edged higher, there remained some big pockets of weakness, including insurance, which has been discussed as a possible recipient for U.S. bailout funds.