Recession Deepens as U.S. Economy Shrank 0.5% in Third Quarter

By Mike Caggeso
Associate Editor
Money Morning

The U.S. economy shrank 0.5% in the third quarter, marking the slowing pace since 2001 and continuing a still deepening recession that has wrung the markets since last year.

Dana Saporta, an economist at Dresdner Kleinwort in New York, told Bloomberg projects a 5.4% overall contraction in the fourth quarter.

“Some of the factors that led to negative growth in the third quarter will be amplified this quarter,” Saporta said. “We have negative growth factored into our forecast through the first half” of 2009.

According to Commerce Department figures, consumer spending fell 3.8% in the third quarter, a sharp contrast from the 1.2% increase in the second quarter – marking the biggest drop in 30 years.

Residential fixed investment, the gross domestic product (GDP) component that includes spending on housing, dropped by 16.0% in the third quarter after falling 13.3% in the second quarter.

Real nonresidential fixed investment decreased 1.7%, in contrast to an increase of 2.5% in the second.

Fresh statistics from the National Association of Realtors suggest similar pain. Single-family home sales fell 8.0%, the slowest sales growth since July 1997. And the national medium home price fell 13.2% from last year to $181,300, the largest drop since the NAR started tracking statistics, and likely the largest decline since the Great Depression, said Lawrence Yun, the trade group's chief economist.

“Falling home prices would lead to faster contraction in consumer spending and further deterioration in bank balance sheets,” Yun said in a news release. “More importantly, falling home values would lead to higher loan defaults, including those recently modified distressed mortgages.”

News and Related Story Links:

• U.S. Department of Commerce:
  Gross Domestic Product: Third Quarter Final 2008 (Final)

• Bloomberg:
  U.S. Economy Shrank 0.5% Last Quarter, Most Since ’01

• National Association of Realtors:
  Existing-Home Sales Decline in Economic Uncertainty