December 23, 2008 / 1:38 PM / 12 years ago

GDP shrank in third quarter as economy chilled

WASHINGTON (Reuters) - The economy shrank at a 0.5 percent annual pace in the third quarter as expected after consumers and businesses cut spending and the country’s recession gathered steam, government data showed on Tuesday.

Stores offering sales to shoppers at Fair Oaks shopping mall in Fair Oaks, Virginia, November 29, 2008. REUTERS/Larry Downing

The U.S. economy entered a recession last December which deepened after the failure of U.S. investment bank Lehman Brothers in September, which froze credit and sent households and firms into a defensive crouch.

“The past couple of quarters have been really weak and if anything, I’m afraid it may indicate a really bad fourth quarter,” said Kurt Karl, chief U.S. economist at Swiss Re in New York.

The Commerce Department, in its final revision, said the decline in gross domestic product in the third quarter versus the previous three months was the steepest since the third quarter of 2001, in the aftermath of the September 11 attacks on the United States.

Analysts polled by Reuters had predicted the report would show GDP declined by an unrevised 0.5 percent in the third quarter after growing at a 2.8 percent pace in the previous three months, when tax rebates temporarily helped fuel demand.

With the numbers coming in smack on target, financial markets largely ignored the report

Consumer spending shrank at a 3.8 percent pace for the sharpest pull-back since 1980, when a global oil crisis tipped the economy toward a prolonged slowdown, while investment in equipment and software slumped 7.5 percent for the largest decline since early 2002.

Corporate profits fell 0.5 percent in the third quarter versus a previously reported 0.4 percent decline and forecasts for a 0.6 percent fall.

A collapse in the U.S. housing market after years of soaring prices sparked the worst financial market turmoil since the Great Depression, which chilled growth and has already inflicted the longest recession since the early 1980s.

Residential investment contracted 16 percent at an annual pace in the third quarter, which was slightly less than previously estimated and subtracted 0.6 percentage points from overall growth.

Americans banked on rising home prices to support other expenditure and as the property market turned down, this had magnified the impact on the rest of the economy.

“It continues to show basically the same story, which is people stopped spending,” said David Wyss, chief economist at Standard & Poor’s in New York.

Expenditures on durable goods fell 14.8 percent, subtracting 1.16 percent from growth. A large chunk of this fall was due to declining demand for motor vehicles, which reduced overall growth by 0.83 percent in the third quarter.

Separate weekly reports on chain store sales offered conflicting signs on holiday shopping activity.

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The International Council of Shopping Centers and Goldman Sachs said their chain store sales index rose 2.6 percent in the week ended December 20, although the year-on-year decline deepened to 0.6 percent.

In contrast, the Johnson Redbook sales index showed a month-to-date decline of 1.1 percent, with sales for the December 20 week 1 percent below their year-ago level.

“Sales growth continued below plan for the third consecutive week ending with a disappointing weekend,” Johnson Redbook said.

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