Economic Tumble Worse Than Expected In 3rd Quarter

WASHINGTON – The economy took a tumble in the summer that was worse than first thought as American consumers throttled back their spending by the most in 28 years, further proof the country is almost certainly in the throes of a painful recession.

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

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

GDP measures the value of all goods and services produced within the U.S. and is considered the best barometer of the country’s economic fitness.

“Consumers and businesses were like deer in the headlights … frozen,” said economist Ken Mayland, president of ClearView Economics.

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 percent in the second quarter.

White House press secretary Dana Perino called the lower GDP figure “troubling” and said new government efforts announced Tuesday to boost the availability of auto and student loans, credit cards, home loans and other consumer lending – at cheaper rates – should eventually help spur more consumer spending.

On Wall Street, those new government efforts provided an early lift to stocks, but the Dow Jones industrials were down about 90 points in afternoon trading.

Meanwhile, the Federal Deposit Insurance Corp. said the list of banks it considers to be in trouble shot up nearly 50 percent to 171 during the third quarter – the highest level since late 1995. The FDIC also said that commercial banks and savings institutions suffered a 94 percent drop in third-quarter profits to $1.7 billion. Except for the fourth quarter of 2007, it was the lowest profit since the fourth quarter of 1990.

The FDIC does not reveal the institutions on its “troubled” list, but on average, about 13 percent of them end up failing.

Nine banks failed in the third quarter, decreasing the FDIC’s deposit insurance fund to $34.6 billion from $45.2 billion in the second quarter, both below the target minimum level set by Congress. There have been 22 bank failures so far this year compared with three for all of 2007. It’s expected that many more banks won’t survive the next year of economic tumult.

Elsewhere, the New York-based Conference Board said its Consumer Confidence Index for November rose to 44.9, from a revised 38.8 in October. Last month’s reading was the lowest since the research group started tracking the index in 1967 and Americans’ views on the economy remain the gloomiest in decades as they grapple with massive layoffs, slumping home prices and dwindling retirement funds.

To revive the economy, President-elect Barack Obama, who takes over on Jan. 20, says a top priority will be working with Congress to enact a massive stimulus package that he says will generate millions of new jobs.

The new, lower third-quarter GDP 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.

American consumers – the lifeblood of the economy – slashed spending in the third quarter at a 3.7 percent pace. That was deeper than the 3.1 percent cut initially reported and marked the biggest reduction since the second quarter of 1980, when the country was in the grip of recession.

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 percent 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 percent decline in disposable income for the quarter.

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

Home builders slashed spending at a 17.6 percent pace, marking the 11th straight quarterly cut and fresh evidence of the depth of the housing slump.

Meanwhile, a report on home prices released Tuesday and downbeat earnings results from homebuilder D.R. Horton, showed further deterioration in the housing market. The Standard & Poor’s/Case-Shiller U.S. National Home Price Index said that home prices tumbled a record 16.6 percent during the third quarter from the same period a year ago. Prices are at levels not seen since the first quarter of 2004.

Fort Worth, Tex.-based D.R. Horton Inc. reported a nearly $800 million loss in its fiscal fourth quarter on slower home sales and more than $1 billion in charges amid a battered housing market.

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 percent, a level seen only once before in the last half-century.

So far, though, the Fed’s rate reductions, a $700 billion 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.

The nation’s unemployment rate is at 6.5 percent, 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. The total of number of unemployed in October was just over 10 million, the most in 25 years.

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, more than fulfilling a classic definition of a recession. That is, two straight quarters of contracting GDP.