Recession Alarm Sounds As Economy Shrinks

GDP Has Worst Showing Since 2001; Consumers Cut Spending By Largest Amount In 28 Years

(CBS/AP)  The economy jolted into reverse during the third quarter as consumers cut back on their spending by the biggest amount in 28 years, the strongest signal yet the country has hurtled into recession.

The broadest barometer of the nation's economic health, gross domestic product, shrank at a 0.3 percent annual rate in the July-September quarter, the Commerce Department reported Thursday. It 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.

The latest GDP reading marked a rapid loss of traction for the economy, which logged growth of 2.8 percent in the second quarter, and is sure to buttress the belief of many economists that the nation is in the throes of a painful downturn.

The deterioration reflected a sharp retrenchment by consumers, whose spending accounts for the largest chunk of national economic activity. Consumers ratcheted back their spending at a 3.1 percent pace in the third quarter, the most since the second quarter of 1980, when the country was in the grip of recession.

GDP measures the value of all goods and services produced within the United States and is the broadest barometer of the country's economic health.

While the third-quarter's contraction wasn't as deep as the 0.5 percent annualized decline analysts expected, the poor showing underscored the terrible toll of the housing, credit and financial crises.

Wall Street took the news in stride, pushing the Dow Jones industrial average up nearly 190 points in a relatively calm session.

Meanwhile, the Labor Department said Thursday that new claims for jobless benefits for the week ending Oct. 25 stood at a seasonally adjusted 479,000, the same as the previous week and above analysts' estimates of 475,000. Jobless claims above 400,000 are considered a sign of a struggling economy.

The grim reports come just days before the nation picks the next president on Nov. 4. Whether Democrat Barack Obama or Republican John McCain wins the White House, the incoming president will inherit a deeply troubled economy and a record-high budget deficit that could cramp his domestic agenda.

Many economists believe the economy will continue to contract into next year, which would more than meet a classic definition of recession - two straight quarters of shrinking GDP.

The National Bureau of Economic Research, the panel of experts that determines when U.S. recessions begin and end, uses a broader definition to determine recessions than two quarters of contracting GDP. That didn't happen in the last recession, in 2001. The NBER takes into account income, employment and other barometers. The finding is usually made well after the fact.

A collapse of the housing market and locked up lending have produced the worst financial crisis to hit the country in more than 70 years.

To cushion the fallout, the Fed slashed interest rates on Wednesday by half a percentage point to 1 percent, a level seen only once before in the last half century.

Fed Chairman Ben Bernanke has warned that the country's economic weakness could last for some time - even if the government's unprecedented $700 billion financial bailout package and other steps do succeed in getting financial and credit markets to operate more normally.

Unemployment now at 6.1 percent could hit 8 percent or higher next year. Disappearing jobs, battered nest eggs and retirement accounts, and falling home prices are likely to make consumers retrench even more.

Underscoring the strain faced by consumers, the report showed that Americans' disposable income fell at an annual rate of 8.7 percent in the third quarter, the largest quarterly drop on records dating back to 1947.

In the third quarter, consumers cut back on purchases of cars, furniture, household appliances, clothes and other things.They pulled back after the bracing impact of the government's tax rebates disappeared.

In addition to consumers, businesses cut back sharply in the third quarter. They cut spending on equipment and software at a 5.5 percent pace, the most since the first quarter of 2002, when the economy was struggling to recover from the 2001 recession.

Home builders slashed spending at a 19.1 percent pace, marking the 11th straight quarterly cut back, and fresh evidence of the depth of the housing slump.

Slower growth for U.S. exports - reflecting less demand from overseas buyers who are coping with their own economic problems - also factored into the weak GDP report. Exports grew at a 5.9 percent pace in the third quarter, a sharp deceleration from the second quarter's 12.3 percent growth rate.

The U.S. economic downturn in the third quarter was accompanied by higher inflation.

An inflation gauge tied to the GDP report showed prices - excluding food and energy - rose at a 2.9 percent pace, up considerably from the 2.2 percent growth rate in the second quarter. Although the new reading is outside the Fed's comfort zone, Fed officials predict the economy's slowdown will damp inflation pressures in the months ahead. The Fed has made clear that its primary mission at the moment is reviving the economy.

Banks Borrow Record Amount From Federal Reserve

Banks borrowed in record amounts from the Federal Reserve's emergency lending program over the past week, while investment banks drew loans at a slower pace.

The Fed's report, released Thursday, showed commercial banks averaged a record $111.9 billion in daily borrowing over the past week. That surpassed the old record — a daily average of $105.8 billion — from the prior week.

For the week ending Wednesday, investment firms drew $87.4 billion. That was down from $111.3 billion in the previous week. This category was recently broadened to include any loans that were made to the U.S. and London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley and Merrill Lynch.

The Fed report showed that its net holdings of "commercial paper" came to $144.8 billion on Wednesday. The Fed created a first-of-its kind program, which started Monday, to buy mounds of this crucial short-term debt that companies use to pay everyday expenses. The Fed has said that around $1.3 trillion worth of commercial paper would qualify.

The report also said insurance giant American International Group's loan from the Fed dropped to $83.5 billion, from $90.3 billion last Wednesday, as the company repaid some of the money. The Fed has said it would loan a total of $123 billion to the firm.

Squeezed banks and investment firms are borrowing from the Fed because they can't get money elsewhere. Investors have cut them off, moving their money into safer Treasury securities. Financial institutions are hoarding whatever cash they have, rather than lend it to each other or customers. The lockup in lending has contributed to a sharp slowing in the overall economy.

[solarrays247-2009]

received over 10 pieces of republican hate sponsored mail over the last 6 days.Plus 4 robocalls on the answering machine. Spewing nothing but hate...no ideas...just hate. If you want to hate people, vote republican. If you want to get to work and help this country, vote Democrat.

Posted by iphyt4u at 04:47 PM : Oct 30, 2008

bump

[sandalwood40]

We''ve already paid off everything but a small mortgage that has a fixed rate. We will not be buying anything but the necessities for the next 8 years. And we will not be putting anything on a credit card. No new car, no vacation. Not while King Obama is in the White House.

[lemonskink]

Bush bankrupted America,economically, morally, and spiritually. Anyone blaming the Democrats are totally off their rocker.

http://www.ronnierayjenkins.com/topics/education/The_Ballad_of_Caribou_Barbie/

[hennighg]

Gee. Think about this. This is all happening on Dubya''s watch, but the neo-cons blame the Democrats. 2 Senators in less than 2 years unravel 6 oppressive years of corporate prosperity. So, the Democrats ARE much more powerful than the neo-naz. . .cons, so shouldn''t they just be put in? Seems to me that if Clinton puts us in the black, W in the red, and 2 Senators are more powerful than Lush Rambeau''s party, with his druggy behind, too, well, then. . .GOP, GOgoodbye.

[ubrew12]

skeezix06 said: "They send our jobs overseas and yet they expect us to continue to spend? Isn''t that sort of like trying to defy gravity? "

Charging your economy to the nations credit card is, as a famous economist once said, like jumping out of an 11-story window:

for 10 stories, you can convince yourself you can fly...

[pvperson]

"Recession Alarm Sounds"

is there anyone in this country that DOESN''T think we''re in a recession?

[zaniacloclo]

Don''t worry everybody Obama is gong to fix this. And whe he doesn''t after spending 4 million dollars on just one ad we will have anarchy...and we will have to all take it out on the media for feeding us a pack of lies...

[skeezix06]

They send our jobs overseas and yet they expect us to continue to spend? Isn''t that sort of like trying to defy gravity?

[krisd999-2009]

How did they come up with 0.3% decline? All we hear is car sales are down 30%, retail 10-15%, housing sales down 50%, disposable income down 8.7%. My own business sales are down 15% in the last 2 months. Where is the increase to compensate for that coming from? Americans are about to have a rude awakening. No government can be trusted! They just robbed us of 700 billion. No one even mentions the trillions given out by the Federal Reserve without a word from Congress.

[iphyt4u]

I received over 10 pieces of republican hate sponsored mail over the last 6 days.Plus 4 robocalls on the answering machine. Spewing nothing but hate...no ideas...just hate. If you want to hate people, vote republican. If you want to get to work and help this country, vote Democrat.

[zaniacloclo]

How naive are people thinking that the president has something to do with our economic crisis. Alan Greenspan was in charge of the Federal reserve for a very long time and his monetary policy created this bubble. The fact that Americans are too stupid to see this and they seem to think that Obama can fix this that is even worse. Obama''s plan is only about spending. To regenerate this economy you need to produce. Create Growth not redistribute it. And yes we need controls in the financial sector to make sure that we as citizens are protected.. No more libertarian economic policies. But socialism is not the answer either.... Good luck with what Obama may bring... Huge Unemployment

[au_fait]

Yes, the last eight years have created a big mess. Senator Obama is well aware of the mess. A President needs to know what the issues are, know how to negotiate and find quality people to work with and beside him with the skill sets needed in each particular area. When I look at the candidates, Senator Obama has all of those qualities while Senator McCain does not. With Senator Obama there seems to be hope again. America needs that.

Posted by ERoosevelt08

Where is he finding these people? You mean two fo his advisors who initiated this housing/credi meltdown?

[eroosevelt08]

Yes, the last eight years have created a big mess. Senator Obama is well aware of the mess. A President needs to know what the issues are, know how to negotiate and find quality people to work with and beside him with the skill sets needed in each particular area. When I look at the candidates, Senator Obama has all of those qualities while Senator McCain does not. With Senator Obama there seems to be hope again. America needs that.

[jon_mccain]

Additional Thoughts on the Bailout
We hang the petty thieves and appoint the great ones to public office.

By Paul Craig Roberts

Just as the Bush regime%u2019s wars have been used to pour billions of dollars into the pockets of its military-security donor base, the Paulson bailout looks like a Bush regime scheme to incur $700 billion in new public debt in order to transfer the money into the coffers of its financial donor base. The US taxpayers will be left with the interest payments in perpetuity (or inflation if the Fed monetizes the debt), and the number of Wall Street billionaires will grow. As for the US and European governments%u2019 purchases of bank shares, that is just a cover for funneling public money into private hands.

[jon_mccain]

The explanations that have been given for the crisis and its bailout are opaque. The US Treasury estimates that as few as 7% of the mortgages are bad. Why then do the US, UK, Germany, and France need to pour more than $2.1 trillion of public money into private financial institutions?

If, as the government tells us, the crisis stems from subprime mortgage defaults reducing the interest payments to the holders of mortgage backed securities, thus driving down their values and threatening the solvency of the institutions that hold them, why isn%u2019t the bailout money used to address the problem at its source? If the bailout money was used to refinance troubled mortgages and to pay off foreclosed mortgages, the mortgage backed securities would be made whole, and it would be unnecessary to pour huge sums of public money into banks. Instead, the bailout money is being used to inject capital into financial institutions and to purchase from them troubled financial instruments.

[jon_mccain]

It is a strange solution that does not address the problem. As the US economy sinks deeper into recession, the mortgage defaults will rise. Thus, the problem will intensify, necessitating the purchase of yet more troubled instruments.

If credit card debt has also been securitized and sold as investments, as the economy worsens defaults on credit card debt will be a replay of the mortgage defaults. How much debt can the Treasury bail out before its own credit rating sinks?

The contribution of credit default swaps to the financial crisis has not been made clear. These swaps are bets that a designated financial instrument will fail. In exchange for %u201Cpremium%u201D payments, the seller of a swap protects the buyer of the swap from default by, for example, a company%u2019s bond that the swap buyer might not even own. If these swaps are also securitized and sold as investments, more nebulous assets appear on balance sheets.

[jon_mccain]

Normally, if you and I make a bet, and I welsh on the bet, it doesn%u2019t threaten your solvency. If we place bets with a bookie and the odds go against the bookie, the bookie will fail, as apparently happened to AIG, necessitating an $85 billion bailout of the insurance company, and to Bear Stearns resulting in the demise of the investment bank.

Credit default swaps are a form of unregulated insurance. One danger of the swaps is that they allow speculators to purchase protection against a company defaulting on its bonds, without the speculators having to own the company%u2019s bonds. Speculators can then short the company%u2019s stock, driving down its price and raising questions about the viability of the company%u2019s bonds. This raises the value of the speculators%u2019 swaps which can be sold to holders of the company%u2019s bonds. By ruining a company%u2019s prospects, the speculators make money.

Another danger is that swaps encourage investors to purchase riskier, higher-yielding instruments in the belief that the instruments are insured, but the sellers of swaps have not reserved against them.

Double-counting of assets is also possible if a bank purchases a company%u2019s bonds, for example, then purchases credit default swaps on the bonds, and lists both as assets on its balance sheet.

[jon_mccain]

The $85 billion Treasury bailout of AIG is small compared to the $700 billion for the banks, and the emphasis has been on banks, not insurance companies. According to news reports, the sums associated with credit default swaps are far larger than the subprime mortgage derivatives. Have the swaps yet to become major players in the crisis?

The behavior of the stock market does not necessarily tell us anything about the bailout. The financial crisis disrupted lending and thus comprised a threat to non-financial firms. This threat would reflect in the stock market. However, the stock market is also predicting a recession and declining earnings. Thus, people sell stocks hoping to get out before share prices adjust to the new lower earnings.

The bailout package is a result of panic and threats, not of analysis and understanding. Neither Congress nor the public knows the full story. If the problem is the mortgages, why does the bailout leave the mortgages unaddressed and focus instead on pouring vast amount of public money into private financial institutions?

The purpose of regulation is to restrain greed and to prevent leveraged speculation from threatening the wider society. Congress needs to restore financial regulation, not reward those who caused the crisis.

[renonv5]

I am betting it will sink even further.......

[rbburnerjr]

Millions of high paying industrial jobs have been sent to China. How are minimum wage jobs supposed to make house payments. Maybe George and John can figure out how to outsource flipping hamburgers next. Billions have been sent to the bankers for their bonuses and billions more have been sent to George and his oil company cronies. No money is left for health care, roads, schools and house payments. George is going to giggle all the way to Texas.