Consumer Cut in Spending the Most Since 1980

The gross domestic product shrank at a rate of 0.3 percent in the third quarter, a strong signal that American economy is in a recession.

(AP Photo/Landov)

Scared and out of money, Americans stopped buying everything from cars to corn flakes in the July-September quarter, ratcheting back spending by the largest amount in 28 years and jolting the national economy into what could be the most painful recession in decades.

With retailers bracing for a grim holiday buying season, the economy isn't just slowing; it's actually shrinking, the government confirmed Thursday. It reported that the nation's gross domestic product declined at an annual rate of 0.3 percent in the year's third quarter and consumers' disposable income took its biggest drop on record.

In simpler words, "The train went off the tracks," said Brian Bethune, economist at IHS global Insight.

Wall Street took comfort in the fact that it wasn't even worse. The Dow Jones industrials rose 190 points.

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But economists say tougher times are still ahead. Believing consumers are cutting back even more right now, they predict a much larger economic decline — anywhere from a 1 to 2 percent rate — during the current October-December period. That would meet a classic definition of a recession — two straight quarters of shrinking GDP.

Not that there's any real doubt now.

Clobbered by pink slips, shrinking nest eggs and falling home values — consumers are holding ever tighter to their wallets. The new report said Americans' disposable income fell at an annual rate of 8.7 percent in the quarter, the largest in records dating back to 1947.

The dismal news came just days before the nation picks the next president. Whether Democrat Barack Obama or Republican John McCain wins the White House, he will inherit a deeply troubled economy and a record-high budget deficit that could cramp his spending plans.

Each side said the new figures supported its political case.

"The decline in 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," Obama said. He pledged to provide tax relief to middle class families and help people facing foreclosure.