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Economy shrinks more than forecast

GDP declines at a 0.5% annual rate in the quarter. Data add to signs of a recession.

November 26, 2008|Associated Press

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 that 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 gross domestic product shrank at a 0.5% annual rate in the July-September quarter.

That was weaker than the 0.3% rate of decline first estimated a month ago and marked the worst showing since the economy contracted at a 1.4% pace in the third quarter of 2001, when the nation was in 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% 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 boost consumer spending.

Meanwhile, the Federal Deposit Insurance Corp. said the list of banks it considered to be in trouble shot up nearly 50% to 171 during the third quarter -- the highest level since late 1995. The FDIC also said commercial banks and savings institutions suffered a 94% drop in third-quarter profit 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% 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 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.

Also, 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. In addition, Americans' views on the economy remain the gloomiest in decades.

The downgrade from the initial GDP estimate mostly reflected an even sharper cutback in consumer spending and less brisk sales growth of U.S. exports. American consumers slashed spending in the third quarter at a 3.7% pace. That was deeper than the 3.1% cut initially reported and marked the biggest reduction since the second quarter of 1980, when the country was in the grip of recession.

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