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THE ECONOMY

Data show clear signs of recession

The gross domestic product shrinks 0.3% in the third quarter as personal spending falls 3.1%, the U.S. reports.

October 31, 2008|Maura Reynolds and Tiffany Hsu | Reynolds and Hsu are Times staff writers.

WASHINGTON — The nation's economy has shifted into reverse amid a staggering drop in consumer spending, the government reported. But that's hardly news to furniture-store owner Chris Horn of Monterey Park.

Horn's store saw business plummet 40% last month, when the financial crisis escalated and stocks plunged.

"Business was pretty steady up until then, but then it dropped off drastically," said Horn, 58, the third-generation owner of Divine's Furniture, which specializes in vintage pieces. "Customers are very reluctant to spend any money right now."

Consumers stepped on the spending brakes so hard, in fact, that the nation's gross domestic product shrank 0.3% in the three months ended Sept. 30, the Commerce Department estimated Thursday.

That was the deepest decline in economic demand since 2001. Moreover, most economists believe it will be the first of at least two consecutive quarters of decline in GDP -- a widely accepted, if unofficial, definition of recession.

In total, personal consumption declined 3.1% in the third quarter, the Commerce Department said. It was the first time since 1991 that consumer spending dropped outright and was the biggest such decline since 1980.

The belt-tightening was led by a 14.1% drop in spending on big-ticket items such as cars and appliances and a 6.4% decline in smaller purchases.

Though the drop-off in consumer spending is bad for the economy, there's at least one positive aspect: It means that more Americans have finally stopped living beyond their means, said Dean Baker, co-founder of the Center for Economic and Policy Research in Washington.

Baker noted that since the 1990s, consumers have been spending more than they should, because the tech-stock bubble and then the housing bubble of the last few years made them feel wealthier than they really were.

"When housing prices go through the roof, people consume more when they see there is more wealth in their homes. And they don't save because they think their home is doing it for them," Baker said.

Until the 1990s, households had a savings rate of about 8% a year. That declined to 2% by 2000 and has mostly stayed below 1% since 2004, including 401(k)s and pension funds, Baker said.

That means many people do not have enough savings to fund their retirement or a safety net if they lose their jobs.

"People should be thinking about how much money they need to put aside," Baker said. "If you're worried about your job, then by all means try to do what you can to build up a buffer. . . . People need to do what's good for them, not what's good for the economy."

There are signs that consumers are beginning to save more. The savings rate shot up to 2.7% in the second quarter before slipping back to 1.3% in the third quarter, according to the Bureau of Economic Analysis.

Young Shin, 24, of Valencia is among those spending less and saving more. The biochemist has been seeing fewer movies, eating fewer meals in restaurants and shopping more on the Internet to save the expense of driving to stores.

And when he goes to Halloween parties this weekend, Shin will don a "ghetto Wolverine" costume he put together from $4 worth of materials. In years past, he would spend about $40 for a store-bought costume.

On a larger scale, Shin has also decided to put off big-ticket purchases like a new car or a big-screen television.

"I can afford it, but do I really need it?" he said. "Do I really want to buy this extravagant TV in this current situation? My friend, who was a nurse, was an inch away from buying a new Audi A5 car, but I convinced him not to get it. And a week later, he got laid off."

Laurence H. Meyer, chairman of 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 about 2.75% in the fourth quarter.

"And it is likely to be relatively severe."

The economic contraction is expected to lead into increased unemployment, as factories and other businesses lay off workers in response to declining demand for their goods.

The Labor Department reported Thursday that new applications for unemployment benefits remained elevated, totaling 479,000 for the second week in a row.

Meyer said he expected the nation's unemployment rate -- currently at 6.1% -- to reach 7.5% sometime next year. The economy needs to grow at about a 2.5% pace just to create enough jobs to keep up with population growth, he noted, but he said that wasn't likely to happen until the second half of 2009.

"Even if this economy turns the corner, unemployment will continue to rise," he said.

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 military spending.

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