U.S. GDP Economy Contracts .03%

Thursday, October 30th 2008

The economy suffered its biggest decline since 2001 in the third quarter, ushering in what may be the worst recession in a quarter century and boosting the chances of Barack Obama and his fellow Democrats in next week’s elections.

Gross domestic product contracted at a 0.3 percent annual pace, less than forecast, a Commerce Department report showed today in Washington. The last major economic data before the election also showed that a record two-decade consumer spending boom ended last quarter as the credit crunch deepened.

“The crisis really kicked up in late September,” Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. in New York, said in a Bloomberg Television interview. “We’re going to be looking at a very unfriendly GDP number in the fourth quarter, with a drop of 2 to 4 percent.”

The economic slump coincided with Democratic presidential nominee Obama’s lead in public-opinion polls. A Bloomberg/Los Angeles Times survey taken Aug. 15-18 showed Republican nominee John McCain with 42 percent support to Obama’s 41 percent; five weeks later, as the credit crunch deepened, the poll showed Obama leading by 49 percent to 45 percent.

Stocks, Treasuries

Stock-index futures, which were up earlier in the day, remained higher after the GDP report. Futures on the Standard & Poor’s 500 Stock Index rose 3.5 percent to 959.20 at 8:39 a.m. in New York. Benchmark 10-year Treasury note yields rose to 3.94 percent from 3.86 percent late yesterday.

The Federal Reserve yesterday warned of further “downside risks” even after cutting interest rates twice this month and pumping billions of dollars into markets.

The slump last quarter was the biggest since the third quarter of 2001, and follows a 2.8 percent growth rate the previous three months. The economy contracted at a 0.2 percent pace in the last three months of 2007.

GDP was forecast to drop at a 0.5 percent pace in the third quarter, according to the median forecast of 75 economists surveyed by Bloomberg News. Estimates ranged from a 1.2 percent rate of expansion to a contraction of 1.9 percent.

The report is the first for the quarter and will be revised in November and December as more information becomes available.

Consumer spending dropped at a 3.1 percent annual pace, the first decline since 1991 and the biggest since 1980, after President Jimmy Carter imposed credit controls. The median forecast was for a 2.4 percent drop.

Worst Since 1950

The 6.4 percent rate of decline in spending on non-durable goods, like clothing and food, was the biggest since 1950.

Cutbacks in investments in business equipment and less spending on residential construction projects also contributed to last quarter’s contraction.

A narrower trade deficit and a smaller decline in inventories prevented a deeper contraction. Excluding those two categories, the economy would have contracted at a 1.8 percent pace, the most since 1991.

The report also showed what may be the last burst of inflation before the economic slowdown forces companies to limit price increases. The price gauge rose at a 4.2 percent pace last quarter, the biggest gain in 17 years. Costs tied to consumer spending and excluding food and energy, increased 2.9 percent, the most in two years.

The Fed yesterday cut the benchmark interest rate by a half percentage point to 1 percent, matching a half-century low, and projected inflation would ebb.

Fed’s Outlook

“The intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit,” the Fed’s statement said. “The pace of economic activity appears to have slowed markedly.”

The National Bureau of Economic Research, the Cambridge, Massachusetts-based official arbiter of U.S. economic cycles, has yet to call a recession.

The group bases its assessment on indicators including GDP, employment, sales, incomes and industrial production, and usually takes six to 18 months to make a determination. According to the NBER, the last recession lasted from March to November 2001.

Chief executive officers from Ford Motor Co., Starwood Hotels & Resorts Worldwide Inc. and Caterpillar Inc. are among those in the past two months that have said the U.S. is in a recession.

Slow Pullout

“You might have a two- or three-quarter negative growth and then a slow pullout,” General Electric Co.’s Chief Executive Officer Jeffrey Immelt said in an Oct. 24 Webcast presentation. Government efforts to improve liquidity will “take a while” to work. GE’s businesses, spanning jet engines, medical equipment and consumer finance, make it an economic bellwether.

Whirlpool Corp., the world’s largest appliance maker, this week said it’ll cut 5,000 jobs, and forecast lower annual profit as the credit crunch clipped sales. Williams-Sonoma Inc., the biggest U.S. gourmet-cookware chain, yesterday forecast a third- quarter loss because sales slowed “significantly” during the past six weeks.

Industry figures showed cars and light trucks sold at a 12.5 million annual pace in September, the fewest since 1993. October sales may drop to an 11 million pace, according to a Deutsche Bank AG estimate.

“These are truly unimaginable times for our industry,” Robert Nardelli, chief executive officer of Chrysler LLC, said in a statement last week. The third-largest U.S. automaker will cut 25 percent of salaried workers and reduce production.

Incomes after taxes and adjusted for inflation dropped at the fastest pace since comparable record began in 1947, today’s GDP report also showed. The 8.7 percent decrease followed an 11.9 percent jump in the previous three months and reflected the influence of the tax rebate payments from the government’s economic stimulus plan.