US economy declined 0.5% in third quarter

Analysts believe the small decline in US economic activity in the third quarter has worsened significantly in the current fourth quarter.

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December 24, 2008 11:31
4 minute read.

As the longest recession in a quarter century intensifies, analysts believe the small decline in US economic activity in the third quarter has worsened significantly in the current fourth quarter. The Commerce Department said Tuesday that the gross domestic product, the broadest measure of economic health, declined at an annual rate of 0.5 percent in the July-September quarter. Corporate profits fell 1.2%. Some economists believe the economy's decline in the October-December period could be as large as 6%. If so, that would be the worst quarterly drop since 1982. "It will get a lot worse before it gets better," said Nariman Behravesh, chief economist at IHS Global Insight, a Lexington, Massachusetts, forecasting firm. "We are in the midst of the worst recession in the post-war period, even factoring in a massive stimulus program." GDP is likely falling at a sharper pace in the current quarter because of widening fallout from the worst financial crisis to hit the US since the Great Depression of the 1930s. If GDP did plunge as much as 6% in the fourth quarter, it would be the sharpest quarterly decline since a 6.4% drop in the first quarter of 1982. Many economists think this quarter could mark the low point of the recession, which is already the longest in a quarter century, having started in December 2007. Analysts are projecting that the huge plunge in GDP they expect in the current quarter will be followed by smaller declines in the first and second quarters of next year, before the economy starts growing again next summer. If the recession ends in June 2009, as many economists are forecasting, it would have lasted 18 months, making it the longest recession since World War II. The Bush administration is preparing the country for worse news to come. "The fourth quarter, because of the credit crisis, the standstill in credit as markets froze up and the financial market turmoil, will be significantly weaker," White House spokesman Tony Fratto told reporters Monday. The Commerce Department said new home sales dropped 2.9% in November to an annual sales rate of 407,000 units, the slowest pace in nearly 18 years. Meanwhile, the National Association of Realtors said sales of previously owned homes, the far bigger part of the market, fell by 8.6% to an annual rate of 4.49 million units. The median sales price of an existing home plunged 13.2% in November to $181,300, the biggest year-over-year drop on records dating to 1968. The median, or mid-point, price for a new home sold in November dropped by 12.7% to $220,400. The 0.5% drop in GDP in the third quarter followed a 2.8% increase in the spring, a period that was boosted by the distribution of millions of economic stimulus payments. President-elect Barack Obama favors a massive second stimulus measure of around $850 billion, which Obama is pushing Congress to pass early next year to limit the severity of the downturn. For the government's last look at third quarter GDP, there were only minor revisions. Spending by consumers plunged at an annual rate of 3.8%, slightly larger than the 3.7% fall reported a month ago. It was the biggest decline in consumer spending, which accounts for two-thirds of economic activity, in nearly three decades, since an 8.6% drop in the second quarter of 1980. Residential construction, where the current economic troubles began, fell at an annual rate of 16 percent in the third quarter, while non-residential construction, which had been buffering the construction industry, faltered as well, dropping by 1.7%. The 1.2% fall in corporate profits followed a 3.8 percent drop in the spring and represented the fifth straight quarter that corporate profits have fallen. The National Bureau of Economic Research has said that the country slipped into a recession in December 2007. In the October-December quarter of 2007, the GDP was falling at an annual rate of 0.2%. GDP then grew by 0.9% in the first quarter and 2.8% in the second quarter before falling by 0.5% in the third quarter. While a common rule of thumb for a recession is two consecutive quarters of falling GDP, the NBER uses other data to determine when recessions begin and end, including employment statistics. The economy has lost jobs every month since January. It shed 1.9 million payroll jobs this year, including more than a half-million jobs lost just in November. The unemployment rate now stands at a 15-year high of 6.7%. Congress enacted a $700b. rescue program in October, and the Federal Reserve has expanded its loan programs by hundreds of billions of dollars as the government has tried to combat the credit crisis. But all those efforts have so far failed to prompt banks to resume more normal lending patterns. As a consequence, many businesses are struggling to attract the financing they need. The weakness is spreading around the world, which has been bad for US exports. Caterpillar, the world's largest maker of mining and construction equipment, said Monday that it would cut executive compensation by up to 50% next year due to slower demand amid the global economic downturn, becoming the latest of several large firms to slash compensation in an effort to lower costs. Earlier this month, FedEx Corp. said it would cut pay for senior executives and freeze the company-sponsored retirement plan contributions for its employees for a year, while AK Steel Holding Corp. said it planned to reduce pay for salaried employees by 5% in 2009. The recession already is the longest since the 1981-82 slump, which lasted 16 months. Rep. Barney Frank, chairman of the House Financial Services Committee, said Monday he is preparing legislation to require that some of the bailout money be spent for specific purposes, such as stemming foreclosures and reducing mortgage rates. Frank is pushing to get the second half of the $700b. rescue fund released next month, before Obama is inaugurated. Frank's bill would impose tighter restrictions on the second $350b., such as requiring banks to report on their new lending every quarter and toughening limits on executive compensation. Many US banks have received federal capital in an effort to stimulate lending.


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