Consumer spending shrank in November

Saturday, December 22, 2001

WASHINGTON -- Consumers, faced with shrinking incomes, were tightfisted in November after their spending rose by a record amount the month before. Another report released Friday showed the country sinking into recession during the third quarter at an even faster rate than previously believed.

Still, analysts believe the economy, which slipped into recession in March, will stage a recovery by the spring.

Although the Commerce Department reported that consumer spending fell by 0.7 percent in November, economists had been bracing for an even larger drop. They said the decline largely reflected a pullback in spending on automobiles.

"Incentives weren't quite as juicy in November as in October when people bought a lot of cars and trucks. There's no way that extraordinary pace could hold up," said Stuart Hoffman, chief economist for PNC Financial Services Group.

Economists said free auto financing was a major factor in October's record 2.9 percent increase in consumer spending.

The Commerce Department also reported that gross domestic product, the total output of goods and services produced within the United States, declined at an annual rate of 1.3 percent in the July-September quarter, the worst performance in a decade.

The government previously estimated that the economy contracted at a rate of 1.1 percent in the third quarter; its initial estimate pegged the decline at a 0.4 percent rate.

Reduced inventories

The GDP dropped, in part, because businesses reduced excess inventories of unsold goods by a record $61.9 billion in the third quarter. While that process subtracts from the GDP, it is positive in the long run because it lays the foundation for ramped-up production in the future, economists said.

"Inventory liquidation is coming to an end and that will help the economic recovery," said Sung Won Sohn, chief economist for Wells Fargo. "The stars are lining up to generate an economic rebound in the first quarter."

Economists believe the economy has declined at a rate of at least 1.5 percent in the current quarter, with inventory reduction playing a big role.

As the Fed's 11 interest-rate reductions this year have their effect on the economy, GDP could be growing at a 5 percent rate by the second half of 2002, said Merrill Lynch economist Stan Shipley.

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