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INSTANT VIEW: Economic growth contracts in Q3

NEW YORK (Reuters) - The U.S. economy shrank at a 0.3 percent annual rate in the third quarter, its sharpest contraction in seven years as consumers cut spending and businesses reduced investment in the face of rising fears that recession was setting in.

The number of U.S. workers filing new claims for jobless benefits was unchanged last week, the Labor Department said on Thursday, staying at levels signaling a weak labor market as the credit crisis hits hiring.

KEY POINTS:

GDP: * The Commerce Department said the third-quarter contraction in gross domestic product was the steepest since the corresponding quarter in 2001. * The contraction was slightly less than the 0.5 percent rate of reduction that Wall Street economists surveyed by Reuters had forecast. * Consumer spending, which fuels two-thirds of U.S. economic growth, fell at a 3.1 percent rate in the third quarter, the first decline since the final quarter of 1991. * Disposable personal income dropped at an 8.7 percent rate in the third quarter - the steepest since quarterly records on this component were started in 1947. * Business investments fell 1 percent after rising 2.5 percent in the second quarter. * The personal consumption expenditures index rose at a 5.4 percent annual rate, the sharpest since early 1990.

JOBLESS CLAIMS: * Initial claims for state unemployment insurance benefits were a seasonally adjusted 479,000 in the week ended Oct 25, matching the revised level from the prior week. * Analysts polled by Reuters had forecast 475,000 new claims versus a previously reported count of 478,000 the week before.

COMMENTS:

NIGEL GAULT, CHIEF U.S. ECONOMIST, GLOBAL INSIGHT,

LEXINGTON, MASSACHUSETTS:

“Firstly, I thought the exports would have done better. So that’s a disappointment to see the export growth slide like that. Of course we know that in the coming months, the picture is likely to darken further.

“Also it is worth noting how much support we had in the quarter from federal government spending, specifically national defense.

“There’s a very big increase in the quarter. Defense spending added nine-tenths of 1 percent to the GDP number. That is a lot. It’s actually quite interesting if you look at what’s going on in the private sector, the private sector was a lot worse than the GDP headline.

“The bad new is the private sector was doing really badly, and if you look across all the categories of private spending apart from nonresidential structures, which cannot possibly continue to grow like this, everything was down. Consumer spending, equipment and software, residential, the whole private side was very weak.”

KEITH HEMBRE, CHIEF ECONOMIST, FAF ADVISORS, MINNEAPOLIS:

GDP: “In terms of markers, it’s less weakness now and more weakness later. I was surprised that housing and construction components were a bit better than expected.

“If the contribution with inventory were to be revised, it could mean either sharp downward revisions in the third quarter or a very weak fourth-quarter.

“The economy is pretty lousy. It’s unlikely to improve in the near term.”

JOBLESS CLAIMS: “It’s little heartening that continued claims have stabilized here for the past three weeks. That would be a positive for the November payroll report but not the October report.”

BILL WALSH, PRESIDENT, HENNION & WALSH, PARSIPPANY, NEW

JERSEY:

“Consumer spending is about 70 percent of the GDP and this looks like the lowest it has been in two decades, which goes to show that in the fourth quarter we are going into recession.

“Treasuries (prices) seem to be off a little bit on both the short end and the long end. The Fed cut yesterday was priced in. We seem to be trading in the same range for the last few days.”

SUBODH KUMAR, CHIEF INVESTMENT STRATEGIST, SUBODH KUMAR &

ASSOCIATES, TORONTO:

“The GDP was down less than consensus, the jobless numbers, to me, look like they’re in line with recent weeks. What I would emphasize is what markets discounted when the S&P 500 went to 900: a weaker earnings environment than we’re likely going to see. Estimates will come down, but the markets have discounted much more.

Today, there is room for the markets to move higher, as they’ve already done overseas, but the overseas movement reflects U.S. recovery. If my theory is correct, the markets have discounted a much worse recession than 2002.

Yesterday’s rate cut was much (more important) for psychology. In my opinion, it was more important that the Fed said it would move into commercial paper and eliminate dollar shortage in other markets.

PIERRE ELLIS, SENIOR ECONOMIST, DECISION ECONOMICS, NEW YORK:

“The Q3 GDP report showed the great weakening in domestic spending that was expected, but that was offset by another big improvement in international trade and a slowdown in the rate of inventory reduction. Inventories fell, but they fell less, which amounts to a positive. But that is not news to the Fed and does not seem to create any further imbalances that would shift the outlook.

“The core PCE price index is significantly worse, but that’s not an issue for the Fed right now. The presumption at the Fed and in the market is that weak growth will work to correct that problem over time.

“New jobless claims affect the October outlook in the sense of validating the level of claims and also, in showing a big increase in continuing claims. It favors the weaker payroll employment forecasts. More and more, the high level of initial claims looks like a genuine reflection of the economy, rather than an artifact of the extended unemployment benefit program. The employment breakdown in the economy appears to be continuing in full force.”

ROBERT BRUSCA, CHIEF ECONOMIST, FACT AND OPINION ECONOMICS, NEW

YORK:

“We are being held up here by government spending, which added 1.1 percentage points to GDP growth. Exports and imports added about another 1.0 percentage point. They are making the number not look so bad.”

“But domestic sources are still very weak. The consumer is making a big subtraction and the business and housing sectors are making subtractions.”

“The GDP number doesn’t reveal the weakness because the impact of international trade which will become less of a stimulus going forward. It’s a warning how weak the economy is.”

MARKET REACTION: STOCKS: Benchmark U.S. equity indexes extend gains after smaller-than-expected decline in GDP. BONDS: Treasury debt prices extend losses after data. DOLLAR: U.S. dollar extends gains versus yen. RATE FUTURES: Fed fund futures maintain gains after data.

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