Economy Contracts, Spending Turns Negative

The Commerce Department reported that real gross domestic product fell at an annualized rate of 0.3 percent in the third quarter, driven by a sharp slowdown in consumer spending.
The broadest measure of economic activity in the U.S. was down significantly from a second quarter growth rate of 2.8 percent and real growth has been negative in two of the last four quarters.

Overall economic growth during the last year remains positive at 0.8 percent, however, this was aided by the $150+ billion economic stimulus plan earlier in the year.

Consumer confidence has recently fallen to record lows and this is evident in the personal consumption component which posted its first decline since 1990 and its biggest decline in 28 years, dropping at an annualized rate of 3.1 percent.

Bloomberg reported spending on non-durable goods, items such as food and clothing, fell at an annualized rate of 6.4 percent, the sharpest decline since 1950.

As shown below, it was the decline in consumer spending that drove overall growth into negative territory during the third quarter as government spending and net exports both made large positive contributions and private investment was only slightly negative.
Note that this is the "advance" estimate for GDP, the first of three readings for the third quarter, to be followed by the "preliminary" estimate next month and the "final" estimate in December. There are often large revisions between the "advance" and "preliminary" readings as incoming data replace sometimes unreliable proxies for some components.

While the news for the third quarter was bad, the fourth quarter is shaping up to be much worse with initial estimates for economic growth between minus 2 and minus 4 percent with a further slowdown in consumer spending expected.

Comments

[websmith:]

This is not a consumer driven recession. Consumers have been stripped of their wealth by special interest driven legislation, wars, unchallenged illegal immigration, cheap foreign labor, offshore manufacturing, and predatory lending practices by financial institutions.

Too much of consumers' money is going to pay interest. Government legislation, the Fed, and the banks have stripped consumers of their wealth. The economy will not recover until consumers do. Lowering the interest rate and throwing money at banks and other corporations is not going to fix the problem. It is only going to make matter worse when the resulting inflation sets in. Banks are going to have to take their lumps along with everyone else. To reduce the severity, banks need to lower interest rates on credit cards, mortgages, personal loans, and lines of credit. Congress also needs to stop fooling around with things that stimulate the economy like tax credits for renewables and they need to stop bringing cheap foreign labor into the country.

ewebsmith.com/Finance/...

2008 Oct 30 09:17 PM

[Moon Kil Woong:]

0% chance the banks will give away their free money to consumers. 0% chance interest rates will drop significantly even at a 0% fed funds rate. They need the giant spread to pay their executives and write off their trillions of bad derivatives. 0% chance the Treasury or Fed gives a crap about the public or consumer. They only care to save the monetary system which happens to be themselves.

So of course consumer spending drops. Don't expect any real government help. It isn't coming.

2008 Oct 30 11:20 PM