GDP REPORT

ECONOMIC REPORT GDP falls 0.3% in third quarter on dive in spending Domestic sales fall 1.8% as impact of rebates wanes By MarketWatch Last update: 8:32 a.m. EDT Oct. 30, 2008 Comments: 1 WASHINGTON (MarketWatch) - The U.S. economy contracted at a 0.3% annualized rate in the third quarter, as consumer spending declined at the fastest rate in 28 years, the Commerce Department estimated Thursday. The 0.3% decline in real gross domestic product was the largest since the end of the last recession in late 2001. The economy grew at a 2.8% pace in the second quarter. The drop was close to economists' expectations that the economy would shrink at a 0.5% annual rate. Final sales to domestic purchasers fell 1.8%, the largest decline in 17 years. Consumer spending dropped 3.1%, the first decline in 17 years and the biggest drop in 28 years, while business investment fell 1%. Investments in homes fell for the 11th straight quarter. After getting a big boost from the tax rebates in the second quarter, inflation-adjusted after-tax incomes fell 8.7%, the largest quarterly decline since the record-keeping began in 1947. Incomes fell much more in the Great Depression, when annual records were kept. The growth figures would have been much worse without sizable positive contributions from government spending, net exports and inventories. GDP has risen 0.8% in the past year. Economists expect the economy to contract in the final three months of this year and the first three months of next year, with unemployment rising to near 8%. It would be the longest contraction since World War II. On Wednesday, the Federal Reserve cut its interest rate target to 1%, matching a 50-year low. Fed policymakers said the economy had weakened markedly, and warned that the continuing credit crunch could keep consumer spending and business investment weak for some time. The Fed said inflation should recede as growth slows. In the third quarter, however, consumer prices rose at a 5.4% annual rate, the biggest increase since 1990. Core inflation, which excludes food and energy prices, rose at a 2.9% annual rate, the most in two years. Core inflation has risen 2.5% in the past year, the largest year-over-year gain in two years. The Fed would like to keep core inflation below 2%. Details In nominal dollars (not adjusted for inflation), GDP increased at a 3.8% rate to $14.43 trillion. The increase was due entirely to higher prices. Personal after-tax incomes taxes fell 3.7% after the tax rebates from the federal government led to a hefty 16.7% gain in the second quarter. Final sales - to domestic and foreign buyers - fell 0.8%, the biggest drop in 17 years. Real consumer spending (adjusted for inflation) fell 3.1%. Spending on durable goods fell 14.1%, the largest decline in 21 years. Spending on nondurable goods fell 6.4%, the largest decline in 58 years. Spending on services rose 0.6%. Consumer spending subtracted 2.3 percentage points from growth. Business investment fell 1%. Investments in equipment and software dropped 5.5%, the largest decline in six years. Investments in structures rose 7.9%. Business investment subtracted 0.1 percentage points from growth. Investments in housing dropped 19.1%, the 11th consecutive quarterly decline. Housing subtracted 0.7 percentage points from growth. The change in inventories added 0.6 percentage points to growth. Imports fell 1.9%, while exports rose 5.9%. Net exports added 1.1 percentage points to growth. Government spending increased 5.8%, adding 1.2 percentage points to growth. Federal spending jumped 13.8%, including an 18.1% rise in defense spending, the biggest growth in five years. Spending by state and local governments rose 1.4%.