U.S. Economy Shrank 0.5% in 3rd Qtr, Most Since ’01

By Shobhana Chandra

Nov. 25 (Bloomberg) -- The U.S. economy shrank in the third quarter faster than previously estimated as consumer spending plunged by the most in almost three decades.

Gross domestic product contracted at a 0.5 percent annual pace from July through September, the most since the 2001 recession, according to revised figures from the Commerce Department today in Washington. The government’s advance estimate issued last month showed a 0.3 percent decline.

The world’s largest economy has sunk into an even deeper recession this quarter as the credit crunch, the worsening housing market, and mounting job losses cause consumers and businesses to retrench. President-elect Barack Obama yesterday warned that the U.S. may lose “millions of jobs” should the federal government not quickly enact an economic-stimulus package.

“We’ve got a big downdraft coming on,” John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, said before the report. “The recession is certainly looking longer and deeper. It’s just getting very tough for consumers.”

U.S. stock-index futures rallied after the Federal Reserve committed up to $800 billion in new funding to unfreeze credit for homebuyers, consumers and small businesses.

Today’s GDP report is the second of three estimates. The figures matched the median estimate of 71 economists surveyed by Bloomberg News. Forecasts ranged from declines of 0.1 percent to 0.9 percent.

The economy grew at a 2.8 percent pace in the previous three months.

Less Spending

Corporate profits, including estimates for the value of inventories and adjustments for capital investments, dropped 0.9 percent from the previous three months, hurt by $46.2 billion in insurance payments and losses caused by Hurricane Ike. It was the seventh decline in the last eight quarters.

Consumer spending, which accounts for more than two-thirds of the economy, dropped at a revised 3.7 percent annual rate, more than the 3.1 percent decrease estimated by the government last month. It was the first decline since 1991 and the biggest since 1980, after President Jimmy Carter imposed credit controls.

Americans may pull back further after employers fired 240,000 workers in October and the unemployment rate jumped to the highest level since 1994.

Wage figures showed a smaller gain than previously estimated in the second quarter, reflecting the weakening job market. Salaries grew $13.3 billion in the second quarter, $37.3 billion less than Commerce’s earlier forecast.

More Firings

Today’s revisions may cause some economists to lower their GDP forecast for the last three months of 2008. Companies cut inventories at a slower pace than previously estimated, indicating more production cuts may be on the way as spending weakens.

Xerox Corp., the world’s largest maker of high-speed color printers, is eliminating 3,000 jobs and trimming manufacturing costs to save $200 million next year. Chief Executive Officer Anne Mulcahy yesterday said at a conference that Xerox isn’t projecting “any quick economic turnaround” in 2009.

Residential construction fell at a 17.6 percent pace, less than the prior estimate. Home starts and permits for future construction both dropped to record lows in October, according to Commerce figures, indicating the housing recession will extend into a fourth year. Home resales also fell in October and prices plunged by the most on record, a private report showed yesterday.

Trade Gap

A narrowing trade gap helped prevent an even deeper slump last quarter. Still, the economy may not be able to depend on continued assistance in coming months. American exports will decline as the International Monetary Fund predicts downturns next year in the U.S., Japan and the euro region, the first simultaneous recession since the end of World War II.

The National Bureau of Economic Research, the Cambridge, Massachusetts-based official arbiter of U.S. economic cycles, has yet to call a recession.

The group bases its assessment on indicators including GDP, employment, sales, incomes and industrial production, and usually takes six to 18 months to make a determination. According to the NBER, the last recession lasted from March to November 2001.

Jeffrey Frankel, a member of the NBER panel, in a Nov. 10 Bloomberg Television interview said the U.S. is entering “the steep part” of what could be the worst recession since World War II. Martin Feldstein and Robert Hall, fellow members of the committee, have said the economy is in a recession.

President-elect Obama, who named key members of his economic team yesterday, vowed to push for a large economic- stimulus package, though he declined to say how big it would be.

To contact the report on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net