U.S. economy shrank from July through September

Kevin G. Hall

WASHINGTON — In the most compelling proof yet that the U.S. economy is in recession, the Commerce Department reported Thursday that economic growth contracted by 0.3 percent during the third quarter of this year and personal consumption fell by the greatest rate in almost three decades.

Personal consumption fell at a 3.1 percent annual rate in the third quarter, the worst showing since the recession of 1991. That was the lowest quarterly contraction in consumption since the 8.6 percent shrinkage during the second quarter of 1980.

Moody's Economy.com said Thursday that 30 U.S. states and 276 metropolitan areas were now in recession.

"Alaska and the District of Columbia are the only states expanding. What started in housing has now become a more broad-based slowdown: Financial market turmoil is weighing on businesses' ability to finance operations, and weak domestic demand and near recession-like conditions globally have brought the economy to its knees," the Moody's Economy.com report said. Moody's is a leading economic-research firm based in West Chester, Pa.

Since consumers drive almost three-quarters of all U.S. economic activity, the sharp drop in personal consumption signals hard times ahead.

"Recession continues to be the outlook," John Silvia, chief economist with the Charlotte, N.C.-based national bank Wachovia, said in a note to investors.

"We never like to see a negative number, and we were expecting a difficult quarter and that's what we're looking at," Commerce Secretary Carlos Gutierrez said in an interview. Gutierrez said he expected the weak economic data to fuel further calls for a second economic-stimulus plan such as the Democrats who control Congress are discussing.

Gutierrez warned, however, that many of the public works projects that are being touted as ways to stimulate the economy won't provide immediate relief.

"We believe if you are going to call something a stimulus package . . . it should be something that has immediate impact on the economy," he said.

The third-quarter economic decline followed a second quarter in which the economy grew by 2.8 percent. Exports were about cut in half from July to September, although they still grew by 5.9 percent, down from a 12.3 percent rate during the previous three months.

"We may see a decline in the growth rate of exports, over the near term," said Gutierrez, conceding that a strengthening dollar, turmoil in global currency markets and economic problems in many important markets for U.S. products are likely to be a drag on growth in months ahead. "It may not be as large or fast-growing as it has been, but we believe exports are going to play a significant role in our economy."

The only measure of growth that was up sharply from the previous quarter was government consumption and investment, up 13.8 percent from July to September compared with 6.6 percent during the second quarter.

There are many reasons to expect that the final three months of the year will prove even worse for growth. The Conference Board's consumer confidence index earlier in the week touched the lowest levels since it began in 1967, and new claims for jobless benefits remain near half a million for each of the past two weeks.

October job numbers from the Labor Department, due out next week, are expected to show unemployment accelerating. In the latest grim employment announcement, American Express announced Thursday that it was shedding 10 percent of its work force, about 7,000 people.

Thursday's numbers and other recent economic data reveal how the U.S. economy is in a vicious downward spiral.

Fewer employed consumers and eroding job security are likely to keep consumption unusually low. That will complicate efforts by the Treasury and Federal Reserve to shore up the troubled banking sector. The government passed a $700 billion rescue package early this month that's designed to boost bank balance sheets and free them up to lend more.

However, banks aren't eager to increase loans amid rising unemployment and an economy that's now thought to be in recession. Lending to consumers in a recession invites higher defaults on car loans, credit card debt and mortgages. All three show rising default rates.

Concerned about the weakening economy, the Federal Reserve cut its benchmark federal funds rate Wednesday by half a point in hopes of lowering the cost of borrowing. The rate now stands at 1 percent, a record low seen before only in 1958 and from June 2003 to June 2004. However, this low rate is less effective when banks are unwilling to lend.

Five days before the election, both major presidential campaigns issued statements on the growth numbers, folding them into their attack messages.

"Today's announcement that third-quarter GDP fell at a 0.3 percent rate confirms what Americans already knew: The economy is shrinking. Barack Obama would accelerate this dangerous course," Douglas Holtz-Eakin, Republican nominee John McCain's chief economic adviser, said in a statement.

Democrat Barack Obama, in a statement, blamed the slowdown on failed policies that McCain would continue:

"The decline in our GDP didn't happen by accident. It is a direct result of the Bush administration's trickle-down, Wall Street first, Main Street last policies that John McCain has embraced for the last eight years and plans to continue for the next four."

ON THE WEB

The Commerce Department report

To see what metro areas are in recession

MORE FROM MCCLATCHY

To ask a question about this story or any economic question, go to McClatchy's economy Q&A

Fed slashes rate again, nearing uncharted waters

Private sector loans, not Fannie or Freddie, triggered crisis

Slowdown in auto sales adds to California's fiscal woes

McClatchy Newspapers 2008