U.S. Economy Shrinks 0.3%

Worst may be yet to come

As a global credit crunch prompted consumers and businesses to retrench, the U.S. economy contracted at a 0.3% pace in the third quarter, the Commerce Department reported on Oct. 30 .

Some analysts said the drop could be just the start of a deep and painful recession in the world's biggest economy. "A heftier decline in real GDP is likely in the fourth quarter, which will confirm that the U.S. economy is in recession," said Dawn Desjardins, economist at RBC Capital Markets.

The decline, not as steep as the 0.5% annualized drop expected by private economists, comes amid mounting expectations of a sharp falloff in the U.S. economy amid the worst banking and financial crisis in decades.

The decrease marked a sharp fall from the 2.8% growth rate of the second quarter and reflected weaker consumer and business spending and housing activity, offset in part by strong exports and government spending.

With the decline, output was estimated at an annualized $14.43 trillion.

Consumer spending, the main driver of economic activity, fell 3.1% in the quarter on a sharp 14% plunge in spending on so-called durable goods like cars and appliances expected to last three years or more, the report showed. Spending on nondurables such as food and clothing slid 6.4%, the biggest decline since 1950.

In housing, which has seen a horrific meltdown after a long boom, investment fell 19.1%, a major drag on the economy.

Robert Brusca at FAO Economics said the report was "worse than it looks.The main pillars of GDP growth are crumbling," he said.

Activity had been supported in the second quarter by a big government stimulus plan that sent out tens of billions of dollars in tax rebates to consumers, but the impact of that has now faded.

Exports, a main source of economic activity ealier this year, also helped keep the GDP figure from being weaker but growth slowed to 5.9% in the third quarter from 12.3% in the second.

Copyright Agence France-Presse, 2008

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