Economy flashes recession signal; GDP down at 0.3% rate

WASHINGTON -- Signaling what could be the start of a prolonged recession, the government said Thursday that the U.S. economy shrank in the July-September quarter as consumers slashed spending and businesses pulled back.

The Commerce Department said gross domestic product, the broadest measure of goods and services produced in the USA, fell at a 0.3% annual rate in the third quarter. Consumer spending, two-thirds of economic activity, plummeted at a 3.1% rate — the steepest fall since 1980. The overall decline was the worst since the 2001 recession, and followed a 2.8% growth rate in the second quarter of 2008.

"Given the scope of job losses … sagging wage gains, restrictive credit conditions and the ongoing housing market correction, consumer spending is on course for an even larger decline," said economist Richard Moody of Mission Residential, a property investment company. He predicts the economy won't recover until the second half of 2009.

Deep trouble in housing contributed to the economic slide, with home building falling for the 11th consecutive quarter. Businesses slashed spending on equipment and software at a 5.5% pace, the biggest decline since 2002. Increased government spending, including defense, softened the contraction. Trade continued to be a positive, but exports rose at just 6% vs. 12% in the April-June quarter.

Analysts cautioned that the third-quarter figures don't include the most recent stock and financial market carnage. "We are now entering the harshest part of the recession," says economist Nigel Gault at IHS Global Insight. Despite the news, the Dow rose 189.73 points to 9180.69.

On Capitol Hill, lawmakers, who are normally in their home states campaigning in the week before Election Day, have been holding hearings on a possible second stimulus bill, including extended unemployment benefits, aid to states and new spending on roads, bridges and other infrastructure projects. President Bush in February signed a $168 billion stimulus package.

The Business Roundtable, representing the largest companies, called for an economic stimulus package including tax cuts, more lending by the Federal Reserve, aid to unemployed workers, and expanded energy initiatives.