A Continued Decline Likely For The GDP The economy experienced its sharpest contraction in seven years during the last quarter. Consumers limited spending and businesses cut jobs and production from July to September. What does it all mean for the country?
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A Continued Decline Likely For The GDP

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A Continued Decline Likely For The GDP

A Continued Decline Likely For The GDP

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ALEX CHADWICK, host:

From NPR News, it's Day to Day. The economy shrank this summer. We now have that officially from the Commerce Department, which is the part of the government which keeps track of these things. Its initial reading on the gross domestic product, or GDP, is that the economy contracted by 0.3 percent. Marketplace's Mitchell Hartman is here. Mitchell, that's not very surprising, is it?

MITCHELL HARTMAN: No. It's really not. And, in fact, the overall number of three-tenths percent annual decline in the third quarter, it isn't even as bad as economists were predicting. But the report also has some pretty dismal news buried within it. Businesses cut back on spending for equipment and software by 5.5 percent. Homebuilders slashed spending by almost 20 percent. Americans' disposable income fell almost nine percent.

And this is probably the worst piece of news, especially going into the holidays, consumers cut back on their spending by 3.1 percent. They were spending less on pretty much everything - cars, furniture, the very clothes on their back. I asked Gus Faucher, chief macroeconomist at moodyseconomy.com, to put these consumer-spending numbers in perspective.

Mr. GUS FAUCHER (Chief Macroeconomist, Moodyseconomy.com): Consumer spending was really terrible, and this is the biggest decline since the recession in 1981. So, consumers are really stretched. Tighter credit is hitting them.

CHADWICK: You know, Mitchell, we hear this talk about heading toward a pretty bad recession. How does what we're going through now compare to other downturns?

HARTMAN: You know, I've been wondering this, too. I remember being a business reporter in both the 1991 recession and then again in the dot-com blowout recession of 2001. Neither seemed as deeply foreboding as what we're going through now and what we're hearing about from government.

I put this question to James Galbraith, who is an economist at the University of Texas. He knows how bad it can get. He learned this at the knee of his father, John Kenneth Galbraith, the classic chronicler of the Great Depression.

Dr. JAMES GALBRAITH (School of Public Affairs, Department of Government, University of Texas): The right comparison is to the Great Crash, the abrupt end of a period of high speculation and financial fraud, a sharp drop in asset values. The Great Crash does not necessarily have to lead to the Great Depression, and I don't think it will.

HARTMAN: Galbraith says the problem now is that a business-cycle recession is compounded by a major financial crisis. Galbraith also thinks that we learned the lessons last time around, in the Great Depression, and government won't let a recession combined with a financial sector collapse turn into something much, much worse.

CHADWICK: You know, every time you ask a government official this, they say, oh, what you call it doesn't matter, but here's the question anyway. Are we officially in a recession? You know, there's one definition, the economy has to contract for two quarters in a row.

HARTMAN: Right. And GDP was up almost three percent in the spring. That was largely due to the tax rebates that we all got. But come late January, when the fourth quarter GDP comes out, it's almost certain the numbers will confirm that we're in recession, and we've been in recession, in fact, for some time.

CHADWICK: Thank you, Mitchell. Mitchell Hartman of public radio's daily business show, Marketplace.

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