GDP down 0.3% as consumers get thrifty

“About 59 percent of the U.S. trade deficit is due to petroleum imports.

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The gross domestic product — driven largely by consumer spending — shrank but not as much as expected. Still, economists predict things will get worse before they get better. Consumers cinched their belts sharply in the last few months, curbing spending and driving economic growth into negative territory, the deepest decline since 2001, the government reported today.

Gross domestic product shrank by 0.3% in the third quarter, a sharp reversal from the 2.8% increase recorded in the second quarter, the Commerce Department said. In total, personal consumption declined 3.1% in the three months ending Sept. 30. It was the first time since 1991 that consumer spending actually dropped, and the biggest decline since 1980. The belt-tightening was led by a 14.1% drop in consumer spending on big-ticket items like cars and appliances and a 6.4% decline in smaller purchases. Roughly 70% of GDP is driven by spending at the consumer level.

The GDP decline was actually somewhat less than investors had expected, and the stock market rallied more than 200 points in the first half-hour of trading. Laurence H. Meyer, chairman of the economic forecasting firm Macroeconomic Advisers, said economists expect things to get worse before they get better. “The economy is sliding into recession and it has a way to go,” Meyer said, predicting that the decline will be around 2.75% in the fourth quarter. “And it is likely to be relatively severe.” The economic contraction is expected to lead to increased unemployment, as factories and other businesses lay off workers in response to declining demand for their goods.

The Labor Department reported today that new applications for unemployment benefits remained elevated, totaling 479,000 for the second week in a row. Meyer said he expects the unemployment rate — currently at 6.1% — to reach 7.5% sometime next year. The economy needs to grow at about 2.5% just to create enough jobs to keep pace with population growth, he noted. “Even if this economy turns the corner, unemployment will continue to rise,” said Meyer. “We’ll need to see growth in the 2.5%-plus range, which is not likely until the second half of next year.” The decline in consumer spending was partially offset by a 5.8% increase in government spending. Most of that came from an 18.1% increase in defense spending by the federal government; non-defense federal spending rose 4.8% and state and local governments increased their spending by just 1.4%.

“The big plus in the report was government spending, That will continue to hold up,” said Gus Faucher, U.S. economist with Moody’s Economy.com, as Congress considers a second fiscal stimulus package. “But if you’re depending on government spending to keep the economy going, you’re in trouble.” Joshua Shapiro, chief U.S. economist for MFR Inc., a New York forecasting firm, noted that exports rose 5.9% in the quarter, which added more than a full percentage point to the GDP figure. But that means that domestic demand actually declined around 1.3%. “All in all, we look for a recession that is both longer and deeper than those in recent memory, lasting at least through 2009,” said Shapiro said in a note to clients. The economy has been troubled since last year, when the effects of the housing crisis began to seep into the rest of the economy. The fourth quarter of 2007 posted a small decline in GDP of 0.1%, and the first quarter of 2008 showed a stronger 0.9% increase.

An economic stimulus program, including tax rebate checks sent to U.S. taxpayers, helped buoy the economy in the second quarter of this year, when the GDP bounced up 2.8%, but the effects did not outlast the gas-price shocks of the summer. Economists say most of the decline in consumer spending took place in the last part of the quarter, as the financial crisis crested. Much of the economic damage from the credit crunch has yet to work its way through the rest of the economy. “The unemployment rate lags the rest of the economy,” Faucher noted. “We expect growth to turn positive in the middle of 2009, but the unemployment rate won’t peak until the end of 2009 or the beginning of 2010. . . . But if things don’t turn around quickly in the credit markets, things will get even worse.”

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