KEY POINTS:
A slump in consumer spending caused the US economy to shrink in the third quarter of the year at the fastest pace since the recession of 2001.
The first estimate of gross domestic product (GDP) for the three months ended 30 September provided long-awaited confirmation that the slowdown
has turned into an outright contraction, after two years of gathering storm clouds that first appeared over the US housing market.
A day after the Federal Reserve cited weakening consumer confidence to justify another sharp cut to interest rates, the Commerce Department calculated consumer spending slipped by 3.1 per cent in the third quarter.
That is the worst drop since 1980, when the US was plunging into a deep recession. It follows 1.2 per cent growth in the second quarter of this year, when households' tax-rebate cheques helped them keep on spending.
Consumer spending accounts for 70 per cent of the US economy, and economists have been increasingly nervous over the outlook for GDP since a consumer confidence survey earlier this week registered an all-time low.
The consensus view is the US will suffer at least one more quarter of negative growth, satisfying a common definition of a recession, but economists fret the stresses in the credit market will keep choking the real economy into next year. The bright spot yesterday was the 0.3 per cent contraction in US GDP was a little less severe than predicted.
The average of economists' forecasts was for a 0.5 per cent decline. Richard Snook, senior economist at the Centre for Economic and Business Research, said: "With much economic data over the last month proving to be more negative than expected, these figures will likely provide some reassurance. The very marginal contraction shows some resilience in the US economy although recession remains certain."
Faced with tighter restrictions on credit and growing job insecurity, US consumers eschewed big purchases such as cars and other durable goods. These big orders plunged 14.1 per cent.
Declining investment in the housing market also acted as a drag on GDP, and business investment likewise contracted. Presaging ill for consumer spending in the fourth quarter and beyond, US unemployment remained high.
New claims for unemployment benefit were 479,000 last week, unchanged from the previous seven days and confounding economists' hopes for a small drop. The figure is above the average for the 2001 recession.
Motorola is planning to cut 3000 jobs worldwide and American Express has said it would cut 10 per cent of its global workforce, some 7000 staff.
It said consumers were spending less and more of them were having trouble keeping up with payments.
Moody's, the credit rating agency, yesterday predicted some retailers will get into financial difficulty over Christmas, and next year could see a big spike in debt defaults.
Holiday sales are the crucial test because most retailers rely on them for the bulk of their annual sales, earnings and cash flow, said Margaret Taylor, Moody's senior credit officer. "Beyond the holidays, uncertainty about jobs, stock prices and the economy is bound to keep consumers focused on the essentials in 2009."
The economic outlook darkened in Europe again. The GfK NOP barometer of consumer sentiment in the UK slipped back to the minus-36 score seen in August.
In the eurozone, a survey by the European Commission showed economic confidence at its lowest ebb in 16 years. Jennifer McKeown, the European analyst at Capital Economics, described the survey result as "simply dreadful".
She told clients the survey "now points to a fall from the second quarter's 1.4 per cent growth to a nasty 0.5 per cent contraction.
"We had been hoping the region's relative lack of imbalances would mean it escaped the severe recession facing the US and the UK, but this and other recent surveys suggest the economy will continue to contract for some quarters at least."
GOING BACKWARD
* US GDP estimated to have contracted by 0.3 per cent in the three months to September 30.
* Consumer spending estimated to have fallen 3.1 per cent.
- INDEPENDENT