Economic Report Card Worse Than Expected

The U.S. economy took a tumble in the summer that was worse than first thought as American consumers throttled back their spending by the most in 28 years, further proof the country is almost certainly in the throes of a painful recession.

The updated reading on the economy's performance, released Tuesday by the Commerce Department, showed gross domestic product shrank at a 0.5 percent annual rate in the July-September quarter.

That was weaker than the 0.3 percent rate of decline first estimated a month ago, and marked the worst showing since the economy contracted at a 1.4 percent pace in the third quarter of 2001, when the nation was suffering through its last recession.

GDP measures the value of all goods and services produced within the U.S. It is considered the best barometer of the country's economic fitness.

The reports come on the heels of a Wall Street rally that drove up major indexes more than 4.5 percent Monday on news of the government's plan to bail out Citigroup Inc., a move investors hope will help quiet some of the uncertainty hounding the financial sector and the overall economy.

On Tuesday, Wall Street showed some signs of stability as investors, heartened by government plans to aid consumer lending companies, selectively bought stocks after a huge two-day rally. According to preliminary calculations, the Dow Jones industrial average rose 36.08, or 0.43 percent, to 8,479.47. The index was up 164 points earlier in the session but also fell 161.

The Citigroup rescue came courtesy of the government's ever-evolving $700 billion dollar bailout package, out of which $310 billion has been committed so far to more than 90 financial firms, reports CBS News correspondent Jeff Glor.

But with the bailout's effectiveness in question and a presidential transition in full swing, uncertainty abounds.

"You've got a guy that's been trying to change a flat tire on a car going a hundred miles per hour. Now he's going to have to get out of the driver's seat and let someone else slide in," Art Hogan, managing director of Jefferies, told CBS' The Early Show. "It's a very difficult process, it's a very dynamic process and the rules of the game change everyday."

The new reading on GDP underscores just how quickly the economy deteriorated as housing, credit and financial crises intensified. The economy logged growth of 2.8 percent in the second quarter.

The new, lower third-quarter reading matched economists' forecasts. The downgrade from the initial estimate mostly reflected an even sharper cut back in spending by consumers and less brisk sales growth of U.S. exports.

American consumers - the lifeblood of the economy - slashed spending in the third quarter at a 3.7 percent pace. That was deeper than the 3.1 percent cut initially reported and marked the biggest reduction since the second quarter of 1980, when the country was in the grip of recession.

Consumers are hunkering down amid job losses, tanking investment portfolios and sinking home values, which are making them nervous about spending.

Underscoring the strain faced by consumers, the report showed that Americans' disposable income fell at an annual rate of 9.2 percent in the third quarter, the largest quarterly drop on records dating back to 1947. The government's initial estimate had showed a record 8.7 percent decline in disposable income for the quarter.

In a bit of good news, however, the New York-based Conference Board said its Consumer Confidence Index for November was 44.9, up from a revised 38.8 in October. Last month's reading was the lowest since the research group started tracking the index in 1967.

Sales of U.S. exports grew at a 3.4 percent pace in the third quarter. That was lower than a 5.9 percent growth rate intially estimated and marked a sharp slowdown from the second quarter's blistering 12.3 percent growth rate. The deceleration reflects less demand from overseas buyers coping with their own economic problems.

Home builders slashed spending at a 17.6 percent pace, marking the 11th straight quarterly cut and fresh evidence of the depth of the housing slump.

To help revive the economy, the Federal Reserve is expected to lower interest rates when its meets on Dec. 16, its last session of the year. Last month, the Fed dropped its key rate to 1 percent, a level seen only once before in the last half-century.

The Federal Reserve also announced Tuesday it will buy up to $600 billion in mortgage-backed assets in another attempt to deal with the financial crisis.

So far, though, the Fed's rate reductions, a $700 billion financial bailout package and a flurry of other radical actions have been unable to break though a dangerous credit clog, restore stability to financial markets and help the sinking economy.

Banks are failing and storied Wall Street firms have been crippled by the crises. Home foreclosures have soared and jobs are vanishing.

President George W. Bush argued Monday that the government's rescue of Citigroup was necessary to protect the financial system and help the economy recover. There could be more such moves if other institutions need help, he said.

But the need for any financial bailouts is not unanimously acknowledged, as some see it as a reward for mismanagement that places an unnecessary long-term burden on taxpayers.

"You've got lots of other banks that are going to need just as much money too. This is a gigantic problem going on out there," international investor Jim Rogers told CBS' The Early Show. "And unfortunately those turkeys in Washington are bankrupting you and me and our children … to save their friends on Wall Street. I find it outrageous. I find it morally outrageous and it's bad economics.

"Banks have been going bankrupt for hundreds of years … It's not the end of the world. You need to clean out incompetence."

President-elect Barack Obama sees as a top priority getting Congress to enact a massive economic stimulus package that he says will generate millions of new jobs. Mr. Obama unveiled Monday the economic team that will be charged with turning the nation's economy around.

The nation's unemployment rate is at 6.5 percent, a 14-year high, and will climb higher. Employers have cut payrolls every month so far this year and more losses are expected in the months ahead.

Given all the stresses, consumers are expected to burrow further, making it likely the economy will continue to shrink through the rest of this year and into 2009, more than fulfilling a classic definition of a recession. That is, two straight quarters of contracting GDP.

Despite the negative outlook, Wall Street was poised to extend its advance to a third day. The Dow Jones industrial average added more than 100 points in morning trading Tuesday.