Source: AFP

WASHINGTON -  The US economy contracted in the third quarter as panicked consumers slashed spending, data showed Thursday in the first downside leg of what analysts say could be a deep and nasty recession.

In its first reading of gross domestic product (GDP) in the July-September period, the Commerce Department said output of goods and services fell at a 0.3 percent annual pace amid a sharp retrenchment by consumers and businesses.

The drop in gross domestic product (GDP) was the first negative figure since the fourth quarter of 2007.

The decline, not as steep as the 0.5 percent annualized drop expected by private economists, comes amid mounting expectations of a sharp falloff in the US economy amid the worst banking and financial crisis in decades.

Some analysts said the drop could be just the start of a deep and painful recession, which is normally defined as two consecutive quarters of negative growth.

"A heftier decline in real GDP is likely in the fourth quarter, which will confirm that the US economy is in recession," said Dawn Desjardins, economist at RBC Capital Markets.

The decrease marked a sharp fall from the 2.8 percent growth rate of the second quarter and reflected weaker consumer and business spending and housing activity, offset in part by strong exports and government spending.

With the decline, economic output was estimated at an annualized 14.43 trillion dollars.

"What is noticeable is that the US economy is hanging onto support from exports that will not last in the fourth quarter," said Avery Shenfeld, economist at CIBC World Markets.

"The rest of the world is slowing and the rising dollar will take some of the shine off exports. The fourth quarter is going to be much worse, with a decline of perhaps as much as two percent."

Consumer spending, the main driver of economic activity, fell 3.1 percent in the quarter on a sharp 14 percent plunge in spending on so-called durable goods like cars and appliances expected to last three years or more, the report showed.

Spending on nondurables such as food and clothing slid 6.4 percent, the biggest decline since 1950.

"The drop in consumer spending was the largest since the recession in the early 1980s," said Augustine Faucher at Economy.com.

"Households are cutting back because of the end of the tax rebates, tighter credit, the worsening labor market, falling house prices, the drop in the stock market, and general angst."

In housing, which has seen a horrific meltdown after a long boom, investment fell 19.1 percent, a major drag on the economy.

While the decline in activity was mild, the report comes amid expectations for one of the worst recessions in decades as the economy is strangled by a collapse in credit amid troubles from banks that bet on the US property bubble.

Ian Shepherdson, chief US economist at High Frequency Economics, noted the GDP number would have been even weaker without accounting for companies building up inventories, which added 0.5 percentage points on the positive side.

"This is the first of a run of negative GDP numbers," he said.

"The economy is in recession. We tentatively expect GDP of minus one percent in the fourth quarter and first quarter of 2009."

Activity had been supported in the second quarter by a big US government stimulus plan that sent out tens of billions of dollars in tax rebates to consumers, but the impact of that has now faded.

Exports, a main source of economic activity earlier this year, also helped keep the GDP figure from being weaker but growth slowed to 5.9 percent in the third quarter from 12.3 percent in the second.

Peter Kretzmer, economist at Bank of America, said another factor skewing the report was a 5.8 percent jump in government purchases,including an 18.2 percent annualized jump in federal defense purchases, which added 0.9 percentage points to GDP.

"We expect a faster pace of GDP decline in the current quarter, as capital spending declines far more rapidly, inventories are reduced at a faster pace, the housing decline remains steep and federal defense spending simmers down," he said.

Citigroup's Steven Wieting said it could get even uglier: "Production and employment declines, credit tightening, and wealth destruction are clearly more severe in the current (fourth) quarter, which should show shrinkage in GDP in excess of the 3.0 percent decline posted in consumption last quarter."