Battered economy shrinks by 0.4 percent in third quarter

Associated Press WriterWASHINGTON (AP) -- The economy, battered by a yearlong slowdown and the jolt of the terror attacks, shrank at a 0.4 percent rate from July through September, a decline that could signal the end to the longest economic expansion in U.S. history.

The drop in the gross domestic product -- the total output of goods and services produced in the country -- was the biggest since the first quarter of 1991 when the country was in the depths of the last recession, the Commerce Department reported Wednesday.

The weak performance reflected a sharp pullback by consumers in spending, which slowed to the weakest pace in more than eight years, and a continued plunge in investment by businesses in new plants and equipment.

Traditionally, a recession is defined as two consecutive quarters of declining GDP. However, the actual dating of a downturn is done by the National Bureau of Economic Research and is based on a number of economic indicators turning negative in addition to the GDP. Many analysts think the country had entered into a recession even before the Sept. 11 attacks, and that when the NBER gets around to establishing the official date it will mark the downturn as beginning last April or May.

The concern now is that shock from the Sept. 11 attacks and the resulting disruptions to the nation's airlines and tourism industries compounded by new concerns over anthrax scares will further depress economic activity.

Many analysts think the 0.4 percent drop in GDP will be followed by an even sharper decline of 1 percent or more in the current October-December quarter.

The worry is that the downturn could feed on itself as consumers cut back further on their spending, which accounts for two-thirds of overall economic activity, and further depress business production, adding to the thousands of layoffs that have already been announced.

President Bush has repeatedly urged Americans since Sept. 11 to keep the terror attacks from disrupting their normal activities. But this message has been diluted by government warnings to the country to be prepared for further terror attacks. Consumer confidence plunged to a 7 1/2-year low in October, according to figures released Tuesday by the Conference Board.

Seeking to counteract the powerful forces pulling the economy down, the Bush administration is urging Congress to quickly pass an economic stimulus package of $60 billion to $75 billion. However, the measure has become entangled in partisan wrangling between House Republicans and Senate Democrats.

The Federal Reserve has cut interest rates nine times this year, with two reductions coming after the attacks. Many economists are looking for another cut when the Fed meets next on Nov. 6.

Many analysts think this massive amount of stimulus will provide enough lift to get the economy growing again next year. But others say that the current unprecedented period of terror threats to the country makes it difficult to forecast when a rebound will occur.

The Fed has room to lower rate further because the weak economy has kept a lid on inflation. An inflation gauge tied to the GDP fell at an annual rate of 0.4 percent in the third quarter, the first decline in four decades.

This decline reflected how the government computes insurance in the GDP and was skewed by the huge losses incurred when terrorists destroyed the World Trade Center. Without this impact, the GDP price gauge would have risen by 0.8 percent, still down from a 1.3 percent rise in the second quarter.

The 0.4 percent decline in GDP in the third quarter did include the government's estimates of the impact of the terror attacks. But for the most part the effects were offsetting for the bottom line number.

For instance, the government said the attacks lowered consumer spending at an annual rate of $700 million. However, government spending for police and firefighter overtime was raised by $800 million at an annual rate.

The third quarter performance followed a barely perceptible 0.3 percent growth rate in the second quarter, a figure that underscored how weak the economy was even before the attacks.

Business investment in new plants and equipment, which has been severely depressed for a year, fell at an annual rate of 11.9 percent in the third quarter, following a 14.6 percent rate of decline. Since the stocks of high-tech companies began plunging, these firms have been scrambling to reduce their spending.

Consumer spending, which had been keeping the economy afloat, rose at a rate of 1.2 percent in the third quarter, a further slowdown from the 2.5 percent increase in the second quarter and the poorest showing since a 0.8 percent increase in the first quarter of 1993.

The 0.4 percent decline in GDP in the third quarter was the biggest drop since a 2 percent plunge in the first quarter of 1991 when the country hit bottom in the 1990-1991 recession.