GDP down 0.3% as consumers get thrifty
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.
Reporting from Washington — 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%.
