Summer slump points to U.S. recession

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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.

“Of course, given the surprises and shocks over the past 18 months,” there is no guarantee, he said. Led by the slump in the U.S., Mr. Karl is predicting recessions in all the major economies from Europe to Japan, although he said the downturns in Japan and Canada will be milder than the one in the U.S.

Both presidential candidates responded quickly to the news.

“The GDP reduction confirms what Americans already knew: the economy is shrinking,” said Republican John McCains top economic adviser, Douglas Holtz-Eakin.

“America is producing less and selling less and our economy is shrinking,” said Democrat Barack Obama. “American consumers were especially hard hit, experiencing their largest decline in spending in 28 years as wages failed to keep up with the rising cost of living.”

“This looks like the lowest it has been in two decades, which goes to show that in the fourth quarter we are going into recession,” said Bill Walsh, president of Hennion and Walsh, an investment firm in Parsippany, N.J.

Mr. Obama blamed the slowdown on “the Bush Administration’s trickle down, Wall Street first, Main Street last policies.”

Mr. Holtz-Eakin said Mr. Obamas policies “would accelerate this dangerous course.”

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