The US economy shrank at a 0.3 per cent annual rate in the third quarter, its sharpest contraction in seven years as consumers cut spending and businesses reduced investment in the face of rising fears that recession was setting in.
The Commerce Department said the third-quarter contraction in gross domestic product was the steepest since the corresponding quarter in 2001 though it was slightly less than the 0.5 per cent rate of reduction that Wall Street economists surveyed by Reuters had forecast.
More spending by the government partly offset a sharp retreat by consumers.
The third-quarter contraction was a striking turnaround from the second quarter's relatively brisk 2.8 per cent rate of growth. It occurred during financial market turmoil that has heightened worry about a potentially lengthy US recession.
Consumer spending, which fuels two-thirds of US economic growth, fell at a 3.1 per cent rate in the third quarter - the first cut in quarterly spending since the closing quarter of 1991 and the biggest since the second quarter of 1980. Spending on nondurable goods - items like food and paper products - dropped at the sharpest rate since late 1950.
"We are being held up here by government spending, which added 1.1 percentage points to GDP growth," said Robert Brusca, chief economist with Fact and Opinion Economics in New York.
"The GDP number doesn't reveal the weakness because (of) the impact of international trade. ... it's a warning how weak the economy is."
Continuing job losses coupled with declines in the value of stocks, other investments and housing prices have put consumers under severe stress.
The GDP report showed that disposable personal income dropped at an 8.7 per cent rate in the third quarter - the steepest since quarterly records on this component were started in 1947 - after rising 11.9 per cent in the second quarter when most of economic stimulus payments still were flowing.
US stock index futures and the dollar extended gains on the better-than expected GDP data, while US government debt prices extended losses.
Separately, the Labor Department said weekly claims for new unemployment benefits continued at a lofty 479,000 last week, a level that signals weak hiring prospects and is likely to intensify consumer anxiety.
Consumers cut spending on durable goods like cars and furniture at a 14.1 percent annual rate in the third quarter, the biggest cut in this category of spending since the beginning of 1987. Car dealers have said that sales have virtually stalled, in part because tight credit makes it hard for even creditworthy buyers to get loans.
Reuters