U.S. economy contracts in third quarter

U.S. economy contracts in third quarter

WASHINGTON, Oct. 30 (Xinhua) -- The U.S. economy contracted in the third quarter of this year at an annual rate of 0.3 percent, signaling the country is likely heading into a recession, the Commerce Department reported Thursday.

This was the worst showing since the world's largest economy shrank at a pace of 1.4 percent in the third quarter of 2001, when the nation was suffering its last recession.

The contraction came as nervous consumers cut back on spending by 3.1 percent, the biggest amount since the second quarter of 1980.

It marked the first drop in consumer spending, which accounts for two thirds of the country's overall economic activity, since late 1991, when the economy was coming out of a recession.

In the July-to-September period, consumers cut back on purchases of cars, furniture, household appliances, clothes and other things.

Meanwhile, businesses cut spending on equipment and software at a 5.5 percent pace, the most since the first quarter of 2002.

Residential spending plunged at a 19.1 percent pace in the third quarter, marking the 11th consecutive quarterly decline.

Exports of goods and services, a major force pushing the economy to grow in the past quarters, slowed in the third quarter, reflecting less demand from overseas buyers who are coping with their own economic problems.

The nation's exports grew at a 5.9 percent pace in the third quarter, a sharp deceleration from the 12.3 percent growth rate in the second quarter.

Imports of goods and services, which are subtracted in the calculation of Gross Domestic Product (GDP), declined by 1.9 percent, compared with a sharper 7.3 percent plunge.

Spending by the federal government increased by 13.8 percent in the third quarter, more than double the 6.6 percent gain in the second quarter.

"Most of the major components contributed to the downturn in real GDP growth in the third quarter," the Commerce Department said in the report.

GDP measures the value of all goods and services produced within the United States. The third-quarter GDP data will be revised twice by the department.

The economic downturn in the third quarter was accompanied by higher inflation.

An inflation gauge tied to the GDP report showed the so-called "core" prices, which exclude volatile food and energy, rose at a 2.9 percent pace, up considerably from the 2.2 percent growth rate in the second quarter.

But the Federal Reserve, which is the U.S. central bank, predicts that the economy's slowdown will dampen inflation pressures in the months ahead.

The contraction in the third quarter was seen as a strong signal that a recession may have already begun.

The classic definition of a recession is two consecutive quarters of negative GDP. Many economists believe the economy will continue to shrink in the fourth quarter and early next year.

Trying to deal with the financial crisis and revive the economy, the Federal Reserve Wednesday cut a key interest rate by half a percentage point to a four-year low of 1 percent, the second rate cut in just three weeks.

Besides cutting interest rates, the Federal Reserve was extending credit lines worth 30 billion dollars each to the central banks of Brazil, Mexico, South Korea and Singapore in an effort to bolster financial markets in those countries and relieve investors' anxieties.

At the same time, the U.S. government started distributing funds Wednesday from the 700 billion dollar financial rescue package passed by Congress early this month.

The government was also nearing an agreement on a plan to help around 3 million homeowners avoid foreclosure. That would be the most aggressive effort to limit damage from the severe housing slump, which began in 2006, according to news reports Thursday.

"Policymakers have their foot to the accelerator and they are using every effort at their disposal to stop the slide in the economy and financial markets," Mark Zandi, chief economist with Moody's Economy.com, was quoted as saying.

"And it's not a moment too soon given the serious damage that has already been done," Zandi said.