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U.S. Economy Shrinks as Consumers Slow Spending

BY Admin  October 30, 2008 at 10:35 AM EST

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The data show a significant drop in the gross domestic product from the prior quarter, which had growth of 2.8 percent. It was the sharpest decline in seven years as consumer spending plummeted for the first time since 1991 and businesses reduced investment as market troubles grew.

The report was released a day after the Federal Reserve cut the key Fed funds rate by half a percentage point to 1 percent in another attempt to relieve the credit crunch. The GDP report was the latest reading of the economy pointing to signs of a recession.

A drop in the numbers was anticipated, though the decline was not as bad as some economists had forecast. Economists surveyed by Briefing.com had estimated the GDP would be down 0.5 percent. The drop may have been mitigated by strong exports because of the weak dollar, gains that will likely be lost with the recent rise in the value of the dollar, reported CNN Money.

If the narrower trade deficit and a smaller decline in inventories were excluded from the report, the economy would have contracted at a 1.8 percent pace, reported Bloomberg News.

“The crisis really kicked up in late September,” Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. in New York, said in a Bloomberg Television interview. “We’re going to be looking at a very unfriendly GDP number in the fourth quarter, with a drop of 2 to 4 percent.”

The economy had been buoyed in the spring by the $168 billion economic stimulus program and the mailing of stimulus checks to consumers. But during the summer, consumer spending, which accounts for two-thirds of the economy, dropped by the largest amount in 28 years. Spending on nondurable goods, such as food and paper products, dropped at the sharpest rate since the late 1950.

The GDP report also showed that disposable personal income dropped at an 8.7 percent rate in the third quarter.

Both presidential candidates’ responded to the news from the campaign trail and took the opportunity to criticize their opponent’s plans.

“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,” Sen. Barack Obama said in a statement.

The McCain campaign statement similarly warned against Obama’s outlook.

“Obama’s ideologically-driven plans to redistribute income will impose higher taxes on families, small businesses, and investors; expensive, rigid, job-killing health mandates on employers,” said the statement.