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US economy shrinks in quarter, worst may be yet to come

The drop in gross domestic product (GDP) was the first since negative figure the fourth quarter of 2007, the Commerce Department reported in the first of three estimates on overall economic output.

The decline, not as steep as the 0.5 percent annualized drop expected by private economists, comes amid mounting expectations of a sharp falloff in the US economy amid the worst banking and financial crisis in decades.

The decrease in activity -- a sharp fall from the 2.8 percent growth rate of the second quarter -- reflected weaker consumer and business spending and housing activity, offset in part by rising exports and government spending.

‘What is noticeable is that the US economy is hanging onto support from exports that will not last in the fourth quarter,’ said Avery Shenfeld, economist at CIBC World Markets.

‘The rest of the world is slowing and the rising dollar will take some of the shine off exports. The fourth quarter is going to be much worse, with a decline of perhaps as much as two percent.’

Consumer spending, the main driver of economic activity, fell 3.1 percent in the quarter on a sharp 14 percent plunge in spending on so-called durable goods like cars and appliances expected to last three years or more, the report showed.

Spending on nondurables such as food and clothing slid 6.4 percent, the biggest decline since 1950.

In housing, which has seen a horrific meltdown after a long boom, investment fell 19.1 percent, a major drag on the economy.

While the decline in activity was somewhat mild, the report comes amid expectations for one of the worst recessions in decades as the economy is strangled by a collapse in credit amid troubles from banks that bet on the US property bubble.

Ian Shepherdson, chief US economist at High Frequency Economics, said the GDP number would have been even weaker without accounting for companies building up inventories, which added 0.5 percentage points on the positive side.

‘This is the first of a run of negative GDP numbers,’ he said.

‘The economy is in recession. We tentatively expect GDP of minus one percent in the fourth quarter and first quarter of 2009.’

Activity had been supported in the second quarter by a big US government stimulus plan that sent out tens of billions of dollars in tax rebates to consumers, but the impact of that has now faded.

Exports, a main source of economic activity ealier this year, also helped keep the GDP figure from being weaker but growth slowed to 5.9 percent in the third quarter from 12.3 percent in the second.

Marie-Pierre Ripert, economist at Natixis, predicted further weakness ahead.

‘Domestic demand is likely to keep falling in the months ahead as a consequence of the credit crunch,’ she said. ‘The rise in the unemployment rate is also likely to weigh on consumer spending.’