The gist: The U.S. gross domestic product fell by 0.3 percent between July and September this year, the Commerce Department reported this morning. The third-quarter decline was less than the 0.5 percent drop expected by the consensus estimate of economists, but this is the worst drop in GDP since the third quarter of 2001. Consumer spending slowed by 3.1 percent in the third quarter, compared with a 1.2 percent increase in the second quarter.
What it means: The data confirm that the U.S. economy is not just slowing; it's shrinking. Consumer spending saw its steepest fall since 1980, as more Americans kept their wallets closed in the face of higher unemployment and sagging home values. The price index for gross domestic purchases increased 4.8 percent—3.1 percent minus food and energy prices. But in cutting its key Fed funds interest rate yesterday by a half-percentage point to 1 percent, the Federal Reserve indicated that it was no longer worried about inflation.
What the experts are saying:
Goldman Sachs U.S. Economic Research
"Real GDP dipped 0.3 percent at an annual rate in the third quarter, roughly splitting the difference between the consensus expectation of a 0.5 percent decline and our estimate for no change. The guts of this report are quite weak, as consumer spending (-3.1 percent), residential investment (-19.1 percent), and capital spending (-1.0 percent) all fell. Relative to our expectations, the declines in consumer and capital spending were worse than we had estimated; the drop in housing activity was modestly smaller. Although the reduced pace of inventory liquidation contributed less to growth than we had expected, government spending—mainly for defense—was much stronger. On balance, we see this report as weaker than implied by the initial market reaction." Ian Shepherdson, chief U.S. economist at High Frequency Economics
"Third quarter GDP fell at a 0.3 percent annualized rate, trivially better than the consensus, -0.5 percent. The deflator rose 4.2 percent, two tenths above consensus; the core rose 2.9 percent, consensus was 2.5 percent. The headline GDP number was supported by a swing in inventories, which added 0.5 percent to growth. Final sales fell at a 0.8 percent rate, rather less than we expected, thanks to a 5.8 percent jump in government spending, almost all on defense, and a 0.8 percent contribution from foreign trade. Consumption was grim, down 3.1 percent, while corporate capital spending dropped 5.5 percent. Housing investment plunged 19.1 percent but commercial structures continued to rise, up a hefty 7.9 percent. Still, the sector is slowing; expect an outright drop in Q4. This is the first of a run of negative GDP numbers; the economy is in recession. We tentatively expect GDP of -1 percent in Q4 and Q1 09." Joseph Brusuelas, chief economist/VP global strategy, for Merk Investments
"Inside the data, the contraction in personal consumption was driven by a -14.1 percent decline in demand for durable goods and a -6.4 percent fall in the purchase of non-durables. The fall in those two categories overwhelmed the anemic 0.6 percent increase in demand for services. The declines of -5.6 percent in fixed investment and -19.1 percent drop in non-residential investment were the primary catalysts behind the -1.9 percent decline in gross private investment.... Excluding the 1.13 percent positive contribution to overall growth due to demand from the external sector and a smaller than anticipated decline in inventories, the economy would have contracted at a rate of 1.8%. The data imply that just about all sectors of the economy are in the process of a serious contraction with the capitulation of the consumer the primary catalyst behind what is clearly the first consumer driven recession in three decades. And what was behind that? A -8.7 percent decline in real disposable personal income in the third quarter in contrast with the 11.9 percent increase observed in the second quarter of 2008. The advance estimate of gross domestic product sets the stage for an operatic end to the recent business cycle in what looks to be a significant contraction in Q4'08 in excess of 4.0 percent."