Summer slump points to U.S. recession

UPDATE 3:

The economy slumped by 0.3 percent in the summer quarter led by a rare 3.1 percent fall in consumer spending, the biggest since 1980, leaving little doubt that the United States is in recession.

The drop in Gross Domestic Product reported by the Commerce Department this morning is the second such decline in the last year, following a 0.2 percent decrease in the final quarter of 2007.

Soaring exports to strongly growing countries overseas enabled the U.S. to post growth in the first two quarters of the year, but a tailing off of export growth added to an overwhelming downturn in the domestic economy to sink the nation into recession during the summer.

The economy’s summer swoon preceded the even more turbulent period this fall that analysts believe has thrown the economy into an even deeper slump. Some expect the big drop in consumer spending, after adjusting for inflation, to continue until the middle of next year. Consumers normally fuel about 70 percent of economic activity.

Nearly every sector contributed to the economy’s decline in the third quarter, according to the department. Housing construction fell by another 19 percent, for its seventh straight double-digit quarterly loss. Businesses also cut spending on equipment and software by 5.5 percent, suggesting they are consolidating and slimming down rather than expanding.

Consumers slashed spending by 6.4 percent on discretionary items like clothing, books and newspapers, while curbing spending on big-ticket items like cars by 14 percent and barely maintaining spending on services like haircuts and entertainment.

Nonetheless, the U.S. stock market posted strong gains for much of the day. The Dow Jones Industrial Index rose more than 200 points above its opening during morning trading, and sustained gains of more than 100 points into the afternoon.

The White House said the report was “weak, but…not unexpected.”

“A number of things contributed to the slowing economy in the third quarter - record high energy prices, housing and credit concerns, two major hurricanes, and a prolonged Boeing strike,” said White House press secretary Dana Perino.

“The president is taking forceful actions to return the economy to growth and job creation by early next year. While we continue to face serious challenges, the United States remains the best place to do business, and were positioned to bounce back.”

The Labor Department also released jobless numbers, which did not change from last week.

But disposable personal income dropped fell by 8.7 percent in the third quarter, the worst decline in that number since records 1947, when the government first began to keep records on that statistic.

“The U.S. economy has clearly moved into recession,” said Swiss Re economist Kurt Karl. “The outlook has deteriorated sharply over the past two months. The credit crisis will have a severe impact on the real economy — in the U.S. and globally.”

Mr. Karl held out hope that the economy will improve in the second half of next year after the financial markets slowly stabilize and the steep fall in the housing market ends.

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