25 November 2008

U.S. economy shrinks 0.5 per cent

This article is excerpted from the 25 November 2008 edition of “globeandmail.com”.

The U.S. economy shrank more in the summer than expected as consumers cut back spending by the most in 28 years.

The updated reading on the economy's performance, released Tuesday by the Commerce Department, showed gross domestic product shrank at a 0.5 per cent annual rate in the July-September quarter.

That was weaker than the 0.3 per cent rate of decline first estimated a month ago, and marked the worst showing since the economy contracted at a 1.4 per cent pace in the third quarter of 2001, when the nation was suffering through its last recession….

The new reading on GDP underscores just how quickly the economy deteriorated as housing, credit and financial crises intensified. The economy logged growth of 2.8 per cent in the second quarter.

The new, lower third-quarter reading matched economists' forecasts. The downgrade from the initial estimate mostly reflected an even sharper cut back in spending by consumers and less brisk sales growth of U.S. exports….

Consumers are hunkering down amid job losses, tanking investment portfolios and sinking home values, which are making them nervous about spending.

Underscoring the strain faced by consumers, the report showed that Americans' disposable income fell at an annual rate of 9.2 per cent in the third quarter, the largest quarterly drop on records dating back to 1947. The government's initial estimate had showed a record 8.7 per cent decline in disposable income for the quarter.

Sales of U.S. exports grew at a 3.4 per cent pace in the third quarter. That was lower than a 5.9 per cent growth rate initially estimated and marked a sharp slowdown from the second quarter's blistering 12.3 per cent growth rate. The deceleration reflects less demand from overseas buyers coping with their own economic problems….

To help revive the economy, the Federal Reserve is expected to lower interest rates when its meets on Dec. 16, its last session of the year. Last month, the Fed dropped its key rate to 1 per cent, a level seen only once before in the last half-century.

So far, though, the Fed's rate reductions, a $700-billion (U.S.) financial bailout package and a flurry of other radical actions have been unable to break though a dangerous credit clog, restore stability to financial markets and help the sinking economy….

President-elect Barack Obama sees as a top priority getting Congress to enact a massive economic stimulus package that he says will generate millions of new jobs.

The nation's unemployment rate is at 6.5 per cent, a 14-year high, and will climb higher. Employers have cut payrolls every month so far this year and more losses are expected in the months ahead.

Given all the stresses, consumers are expected to burrow further, making it likely the economy will continue to shrink through the rest of this year and into 2009,….