GDP Probably Contracted as Spending Fell: U.S. Economy Preview

By Shobhana Chandra

Oct. 26 (Bloomberg) -- The U.S. economy shrank last quarter for the second time in a year as consumers and companies pulled back, reports this week may show.

Gross domestic product contracted at a 0.5 percent annual rate from July to September, the biggest drop since the 2001 recession, according to the median estimate in a Bloomberg News survey ahead of Commerce Department figures due Oct. 30.

Consumer spending, the biggest part of the economy, probably dropped by the most in almost two decades as job losses mounted, stock prices sank and property values plummeted. Federal Reserve policy makers, meeting this week, are forecast to lower interest rates for a second time this month to try to thaw frozen credit markets and prevent a deepening recession.

``I don't see how the consumer can do anything but retrench,'' Robert McTeer, former president of the Fed Bank of Dallas, said in an Oct. 24 Bloomberg Television interview. ``If they all do it at the same time, it will really tank the economy.''

The projected economic contraction would follow a growth rate of 2.8 percent in the second quarter. The economy shrank at a 0.2 percent pace in the last three months of 2007.

Economists also forecast consumer spending dropped at a 2.4 percent pace last quarter, the first decline since 1991 and the biggest since 1990, according to the survey median.

Purchases fell 0.2 percent in the final month of the quarter after stalling in August, a Commerce report Oct. 31 is projected to show. Incomes likely grew 0.1 percent, a fifth of the gain in the prior month.

Growing Pessimism

Consumer sentiment probably plunged this month as stocks crashed, raising the risk the slump in spending will be even worse this quarter. The Conference Board's consumer confidence index, due on Oct. 28, probably fell to 52 from 59.8 in September, the survey median showed.

The International Council of Shopping Centers predicts the November-December holiday season, which brings in more than a third of some retailers' annual sales, will be the worst since 2002.

Wal-Mart Stores Inc., the world's biggest retailer, is seeing consumers use credit cards less often because they are ``feeling the pain'' of the financial crisis, said Eduardo Castro-Wright, the company's U.S. stores chief. Americans feel ``maxed out,'' he said in a speech in Los Angeles on Oct. 21.

Household wealth is disappearing as foreclosures drive down home prices. Home values in 20 U.S. cities fell in August at the fastest pace on record, economists forecast figures from S&P/Case-Shiller on Oct. 28 will show.

Fewer Sales

Sales are still dropping as stricter lending rules and concern that property values will keep plunging scare off prospective buyers. A Commerce report tomorrow may show purchases of new homes fell in September to a 17-year low, according to the Bloomberg survey median.

The squeeze on credit and faltering overseas demand is hurting U.S. manufacturers. The Commerce Department may report on Oct. 29 that orders for durable goods, those meant to last several years, fell in September for the second consecutive month, according to the Bloomberg survey.

Policy makers will likely focus on the risks to growth when they meet on Oct. 28-29 as the economic slowdown has depressed oil prices and eased concern about inflation.

The benchmark rate will be cut by a half point to 1 percent, according to economists surveyed. Trading in financial futures indicates there is about a one-in-four chance the rate will be reduced by three-quarters of a point to 0.75 percent, the lowest level in the two decades since policy makers established an explicit federal funds target.

                         Bloomberg Survey

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                       Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
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New Home Sales ,000's    10/27     Sept.      460       450
New Home Sales MOM%      10/27     Sept.     -11.5%    -2.2%
Case Shiller Monthly YO  10/28      Aug.     -16.4%    -16.6%
Case Shiller Monthly In  10/28      Aug.     166.2     165.0
Consumer Conf Index      10/28      Oct.      59.8      52.0
Durables Orders MOM%     10/29     Sept.     -4.8%     -1.2%
Durables Ex-Trans MOM%   10/29     Sept.     -3.3%     -1.5%
GDP Annual QOQ%          10/30      3Q A      2.8%     -0.5%
Personal Consump. QOQ%   10/30      3Q A      1.2%     -2.4%
GDP Prices QOQ%          10/30      3Q A      1.1%      4.0%
Core PCE Prices QOQ%     10/30      3Q A      2.2%      2.5%
Initial Claims ,000's    10/30    Oct. 25     478       475
Cont. Claims ,000's      10/30    Oct. 18     3720      3720
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To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net