WASHINGTON
(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 Commerce Department said the third-quarter contraction in gross
domestic product was the steepest since the corresponding quarter in
2001 though it was slightly less than the 0.5 percent rate of reduction
that Wall Street economists surveyed by Reuters had forecast.
More spending by the government partly offset a sharp retreat by consumers.
The third-quarter contraction was a striking turnaround from the
second quarter's relatively brisk 2.8 percent rate of growth. It
occurred during financial market turmoil that has heightened worry
about a potentially lengthy U.S. recession.
Consumer spending, which fuels two-thirds of U.S. economic growth,
fell at a 3.1 percent rate in the third quarter -- the first cut in
quarterly spending since the closing quarter of 1991 and the biggest
since the second quarter of 1980. Spending on nondurable goods -- items
like food and paper products -- dropped at the sharpest rate since late
1950.
"We are being held up here by government spending, which added 1.1
percentage points to GDP growth," said Robert Brusca, chief economist
with Fact And Opinion Economics in new York. "The GDP number doesn't
reveal the weakness because (of) the impact of international trade. ...
it's a warning how weak the economy is."
Continuing job losses coupled with declines in the value of stocks,
other investments and housing prices have put consumers under severe
stress. The GDP report showed that 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 -- after
rising 11.9 percent in the second quarter when most of economic
stimulus payments still were flowing.
U.S. stock index futures and the dollar extended gains on the
better-than expected GDP data, while U.S. government debt prices
extended losses.
Separately, the Labor Department said weekly claims for new
unemployment benefits continued at a lofty 479,000 last week, a level
that signals weak hiring prospects and is likely to intensify consumer
anxiety.
Consumers cut spending on durable goods like cars and furniture at a
14.1 percent annual rate in the third quarter, the biggest cut in this
category of spending since the beginning of 1987. Car dealers have said
that sales have virtually stalled, in part because tight credit makes
it hard for even creditworthy buyers to get loans.
Businesses also were clearly wary about the future, cutting
investments at a 1 percent rate after boosting them 2.5 percent in the
second quarter. It was the first reduction in business investment since
the end of 2006. Inventories of unsold goods backed up at a
$38.5-billion rate in the third quarter after rising $50.6 billion in
the second quarter.
The third-quarter GDP number would have been worse except for a
surge in federal government spending, which shot up at a 13.8 percent
annual rate. That was more than double the second quarter's 6.6 percent
rate of increase and was the strongest since the second quarter of 2003
when the war in Iraq began.
Prices were still rising relatively strongly in the third quarter,
with the personal consumption expenditures index up at a 5.4 percent
annual rate, the sharpest since early 1990. Even excluding volatile
food and energy items, core prices grew at a 2.9 percent rate, up from
the second quarter's 2.2 percent rise.
However, oil prices peaked in July and many commodity prices have
begun to ease. The Federal Reserve indicated on Wednesday when it
slashed interest rates again that its concern for the future was
focused more heavily on weak growth than on inflation.
(Reporting by Glenn Somerville, editing by Neil Stempleman)
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