Consumers Wary As U.S. Economy Shrinks

The nation's gross domestic product went negative in the third quarter, falling by 0.3 percent. Consumer spending was especially weak, falling more than 3 percent in the period. That's the sharpest drop in spending in 28 years.

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MICHELE NORRIS, host:

It's All Things Considered from NPR News. I'm Michele Norris.

ROBERT SIEGEL, host:

And I'm Robert Siegel. And in case you need further confirmation that the economy is in trouble, well the government provided some definitive evidence today. It released data showing the economy went into reverse in the late summer. As NPR's John Ydstie reports, most economists think the worst is yet to come.

JOHN YDSTIE: The government's report on growth in the third quarter, the July through September period, showed the U.S. economy declining at an annual rate of three-tenths of one percent. The big reason was a very sharp drop in consumer spending. Not surprising given the forces lined up against consumers, says Laurence Meyer, a former Federal Reserve governor.

Dr. LAURENCE MEYER (Vice Chairman, Macroeconomic Advisers; Former Governor, Federal Reserve): In the third quarter, we were still having some effect of the earlier rise in energy prices. We have a weakening labor market. We have falling home prices and equity prices undermining household wealth. We have tighter credit conditions.

YDSTIE: It adds up to the biggest fall in consumer spending since the severe recession of the early 1980s, and it's pushed this economy into recession, says Meyer.

Dr. MEYER: I think there's no question the economy is in a recession, and the question is, you know, how long and how deep is it going to be?

YDSTIE: Meyer, now vice chairman of the forecasting firm, Macroeconomic Advisers, thinks the recession will extend into mid-2009 and unemployment will rise to about seven and a half percent. But he doesn't think the downturn will be extraordinarily deep. Nouriel Roubini, an economics professor at New York University's Stern School of Business, is more pessimistic, a view he shared with Congress' Joint Economic Committee this morning.

Dr. NOURIEL ROUBINI (Professor of Economics and International Business, Stern School of Business, New York University): I expect that this recession is going to last at least 18 months, if not 24 months. This is going to be much longer, more severe, more protracted than the average U.S. recession that lasts only 10 months.

YDSTIE: Roubini possesses a certain level of credibility right now because he predicted much of the financial crisis that has pushed the economy into recession. He told lawmakers today that this would be the worst recession since World War II, unless they enact another stimulus package quickly. Because consumers and businesses are in retreat, he says, the new stimulus package should not be in the form of rebates to companies, which are cutting back on spending, or to individuals, who would probably save it or use it to pay off debt. He believes the stimulus should come in the form of government spending.

Dr. RUBINI: Of course, you want to have this spending on things that are productive, like infrastructures, like investments in, maybe, alternative energy or renewable energy. And you also have to provide aid and income to those parts of the economy that are more likely to spend it. So, aid to state and local government is going to be effective, increasing unemployment benefits, food stamps to people that are poor.

YDSTIE: There has been support for those kinds of measures building in Congress, but the Bush administration is skeptical of that approach. Commerce Secretary Carlos Gutierrez, whose department released the GDP report containing the bad news on the economy today, says a stimulus package should have an immediate impact on the economy.

Secretary CARLOS GUTIERREZ (Department of Commerce): What we have heard that people are putting into a so-called stimulus package at Congress, you know, contains projects that take three, four years to complete, projects that take months, even years to get started. And I'm not saying those are bad projects. I'm just saying that those aren't stimulus.

YDSTIE: Nouriel Roubini counters that given the potential length of this recession, up to two years in his view, sustained stimulus from longer-term projects should be considered. John Ydstie, NPR News, Washington.

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U.S. Economy Contracts, Signaling Recession

The U.S. economy shrank by 0.3 percent during the third quarter, as consumers reined in their spending, the Commerce Department said Thursday. It was the latest evidence of the toll the credit crunch and housing downturn have taken on growth.

The decline was somewhat smaller than most economists had expected but still represented a significant drop from the second quarter, when the economy expanded by 2.8 percent. Only a ramp-up in government spending kept the economy from shrinking even more, according to the Commerce Department.

Stock prices rose after the report's release, perhaps because most investors were expecting an even bigger drop in GDP. The Dow Jones industrial average closed up 189 points at 9,180.

"The key takeaway from the report is that the signals for private-sector spending were almost all negative," wrote Nigel Gault, chief U.S. economist for Global Insight. Residential construction and business equipment spending declined, while exports slowed, he noted.

Perhaps the most worrisome part of the report was a 3.1 percent decline in consumer spending, the sharpest drop since 1980, he said. Consumer spending typically accounts for two-thirds of U.S. economic activity and has an outsized impact on growth. Disposal personal income fell at an annual rate of 8.7 percent in the third quarter, the biggest drop since the data were first compiled in 1947.

"Everything went wrong for the consumers," wrote economist Sung Won Sohn, of California State University at Channel Islands. "The surge in oil price hurt spending after adjusting for inflation. The effects of the tax rebate during the second quarter are gone. The ongoing financial collapse and the plunge in consumer confidence did not help.

"Upcoming holiday sales will be one of the worst for decades. Consumers have neither income nor the confidence to go shopping," he said. The only bright spot for consumers has been the price of oil, which has fallen by more than half since the summer, he said.

The decline in growth almost certainly signals that a recession is under way, Sohn added.

The National Bureau of Economic Research, usually considered the official arbiter of whether recessions are taking place, hasn't yet called one. But most economists think a recession has already begun, citing the size of the labor market, which has declined every month this year.

The drop in growth comes at the tail end of an especially dramatic presidential campaign, in which the economic downturn has played a central role. Since the turmoil in the financial markets intensified last month, Republican John McCain has fallen behind Democrat Barack Obama, who has attempted to tie his opponent to what he calls the failed economic policies of President Bush.

Meanwhile, the Labor Department said that new claims for jobless benefits for the week ended Oct. 25 stood at a seasonally adjusted 479,000, unchanged from the previous week and above analysts' estimates of 475,000. Jobless claims above 400,000 are considered a sign of a struggling economy.

Bush administration officials insisted Thursday that while the GDP numbers were bad, the economy is beginning to rebound, thanks to steps taken by the Treasury Department and the Federal Reserve. They have included a series of interest rate cuts, including a half-point cut in the federal funds rate Wednesday, and the $700 billion rescue plan approved by Congress earlier this month.

"We know that while we're making a great deal of progress on the implementation of the rescue and freeing up of credit, it is going to take some time," said Commerce Secretary Carlos Gutierrez.

"We are expecting several difficult months, perhaps a couple of difficult quarters. The important thing is we are making progress, we're getting through it," he said.

The decline in consumer spending is a concern, Gutierrez said. But, he added, "We believe that can be traced directly to the lack of credit in the marketplace and that number should improve as credit flows more freely."

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