Consumers this summer pulled back on spending by the most since 1980, driving the economy into what analysts expect to be one of the nastiest recessions in decades.
The nation's legions of shoppers started out the summer cutting back on purchases from food and clothing to cars primarily because of record high gas prices of more than $4 a gallon. But the trend worsened even as gas prices dropped with the approach of fall, when a severe credit crisis caused huge stock losses, job cuts and an unprecedented collapse in consumer confidence.
Battered consumers cut spending by 3.1 percent, curbing purchases of both essential and discretionary goods such as clothing, newspapers, food and fuel by 6.4 percent -- the most since 1950 -- and slashing purchases of big-ticket items such as cars and appliances by a devastating 14 percent, the Commerce Department reported Thursday.
Consumers barely maintained spending on services from haircuts to sports and entertainment.
Consumers normally fuel 70 percent of economic activity and continued to spend during the last recession in 2001, but their rare retraction in the latest quarter caused the economy to shrink by 0.3 percent.
With a multitude of developments from job losses to falling credit card limits conspiring to keep consumers at bay, analysts say, the economy is in for a long slog. A recovery may not arrive until this time next year.
"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 banking system and financial markets slowly stabilize and the housing market ends its steep fall.
"Of course, given the surprises and shocks over the past 18 months," there is no guarantee, he said. The stock market took heart that the summer decline in the economy was not as big as expected, enabling the Dow Jones Industrial Average to rally Thursday by 190 points.
The downturn among the nation's inveterate shoppers is bad news not only for U.S. retailers, automakers and other businesses -- many of which face the prospect of bankruptcy in coming months -- but for the whole world. The rich U.S. consumer market for years has been the destination of choice for exporters from Japan to Chile.
Mr. Karl predicts that the U.S. slump will lead to recessions in all the major economies of Europe and Japan, although he said the downturns in Japan and Canada will be milder than the one in the U.S.
Harm Bandholz, an economist with Unicredit Markets, questioned a Commerce Department report showing a huge 8.6 percent drop in food purchases. That by itself cut the growth rate by nearly a full percentage point, he said. The department's unusually large 4.2 percent inflation adjustment, he said, may have exaggerated or distorted the decline in spending on food. He said other reports show consumers have focused their spending this year on essentials such as food and shelter.
While economists are nearly unanimous in saying the United States is in a recession that may have started as long ago as January, it has not been declared officially by a Boston committee of academic economists charged with determining when recessions begin and end in the United States. The 0.3 percent economic decline in the summer quarter was the second in the past year, after a 0.2 percent decline in the final quarter of 2007.
Together, the trend leaves little doubt that the economy is in a significant slump. Tax rebates that arrived in consumer mailboxes in May and June, combined with robust growth in U.S. exports to emerging markets, enabled the economy to post growth in the first two quarters of the year. But a tailing off of export growth during the summer added to an overwhelming downturn in the domestic economy to sink the nation unequivocably into recession territory.
"It's finally official: The U.S. economy is indeed contracting," said Paul Lennox, corporate treasurer at Custom House, a Canadian investment firm. He noted that the 300 million American consumers fuel 14 percent of economic activity worldwide.
While consumers led the way, nearly every sector contributed to the economy's decline in the third quarter, according to the department. Housing construction fell by 19 percent, for its 10th straight double-digit quarterly loss. Businesses cut spending on equipment and software by 5.5 percent, suggesting they are slimming down rather than expanding.
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 downturn in consumer spending to continue next year.
"We are now entering the harshest part of the recession," said Nigel Gault, an economist at Global Insight. "The economy ended the third quarter much weaker than it began, even before the most extreme turmoil in global financial markets erupted in October."
Global Insight is predicting a deep contraction of 3 percent in the economy during the fourth quarter. Mr. Gault noted that a big surge in defense spending helped prop up growth during the summer, and that will not repeat at the end of the year.
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