Daily Forex Fundamentals | Written by RBC Financial Group | Oct 30 08 13:42 GMT |

U.S. Economy Contracted Modestly in Third Quarter The U.S. economy contracted modestly in the third quarter at a 0.3% annualized pace, slightly less than forecast with economists looking for a 0.5% annual rate dip. However, the report showed a sharp deceleration in consumer spending, which contracted at a 3.1% annualized pace - the sharpest drop in 28 years - and a hefty 19.1% annualized decline in residential investment. This morning's report highlighted the widespread weakening in the U.S. economy with export growth slowing to a 5.9% annualized pace, albeit from a rapid 12.3% rate in the second quarter. Net exports contributed 1.13 percentage points to the quarterly growth rate, down from 2.93 percentage points in the second quarter. Businesses pulled back with spending on non-residential structures slowing to a 7.9% increase, while investment in equipment and software slumped again, falling by 5.5% (at an annualized rate). The sharp drop in consumer spending trimmed 2.25 percentage points from the quarterly growth rate with falling purchases of food and motor vehicles accounting for most of the decline. An expected slowing in the drawdown of inventories contributed 0.6 percentage points to growth in the third quarter while government expenditures added 1.2 percentage points. Annualized quarterly growth in the third-quarter core PCE deflator, the key inflation measure in the GDP report, rose to a 2.9% from 2.2% in the second quarter. The data support the notion that the fiscal stimulus package provided only a very temporary boost to the economy in the second quarter that was fully unwound in the third quarter as households contended with the tightening in lending standards that made borrowing more difficult, deteriorating balance sheets and growing job losses. With these conditions persisting early in the fourth quarter, a heftier decline in real GDP is likely in the fourth quarter, which will confirm that the U.S. economy is in recession. For policymakers, initial signs that the seized-up funding markets are starting to thaw are encouraging news but, until there is evidence that financial institutions are willing and able to make loans to businesses and households, downside risks to the economy will remain. RBC Financial Group http://www.rbc.com The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.