3rd Quarter GDP Goes Negative

We now have confirmation that the U.S. is beginning a recession.  Reuters reports: >

The economy shrank at a 0.3 percent annual rate in the third quarter, its sharpest contraction in seven years as consumers cut spending and businesses reduced investment in the face of rising fears that recession was setting in.

The Commerce Department said the third-quarter contraction in gross domestic product was the steepest since the corresponding quarter in 2001 though it was slightly less than the 0.5 percent rate of reduction that Wall Street economists surveyed by Reuters had forecast.>

The culprit was what all of us expected: consumer spending, which has propped up GDP growth for the last few years, finally succumbed to higher oil prices, lower home prices, and the shut-off of the second mortgage spigot that had fueled the borrowing binge of the last few years.

>Consumer spending, which fuels two-thirds of economic growth, fell at a 3.1 percent rate in the third quarter — the first cut in quarterly spending since the closing quarter of 1991 and the biggest since the second quarter of 1980. Spending on nondurable goods — items like food and paper products — dropped at the sharpest rate since late 1950.

Continuing job losses coupled with declining gains from stocks and other investments have put consumers under severe stress. The report showed that disposable personal income dropped at an 8.7 percent rate in the third quarter — the steepest since quarterly records on this component were started in 1947 — after rising 11.9 percent in the second quarter when most of economic stimulus payments still were flowing.

Consumers cut spending on durable goods like cars and furniture at a 14.1 percent annual rate in the third quarter, the biggest cut in this category of spending since the beginning of 1987. Car dealers have said that sales have virtually stalled, in part because tight credit makes it hard for even creditworthy buyers to get loans.<

These are not good numbers, and point to a protracted downturn.  If there is some kind of symmetry in business cycles, then the seven years of credit boom would be followed by seven years of credit bust.  I hope it won't be that way, and there will certainly be efforts by our political establishment to crank out another stimulus package, soon.  There is already one on the table in Congress, and it is hard to see that it will not be passed.

The statistical evidence that stimulus works is quite high, so that is good news.  The economy desperately needs a shot in the arm.  But, whether it will be enough to turn things around and stay turned around, is another question.  It is unlikely to be large enough to make a miracle, and that is what is needed for now.  But it looks as if there could be several quarters of decline, putting the recovery at or beyond June of 2009.  And that's the best outlook. It may be even worse, but I think there will be a Herculean effort from our new president to shorten the cycle once he takes office in late January.