Economy shrinks in third quarter

WASHINGTON -- The U.S. economy, battered by the terrorist attacks, turned in its worst performance in a decade during the third quarter, shrinking at a rate of 1.1 percent. Many economists expect an even steeper drop in the current quarter but are hopeful for a turnaround next year.

The revised reading on gross domestic product released by the Commerce Department Friday showed the economy was much weaker in the July-September quarter than the 0.4 percent rate of decline estimated a month ago.

The 1.1 percent drop in GDP -- the total output of goods and services in the United States -- followed a barely discernible growth rate of 0.3 percent in the second quarter and illustrated just how quickly and dramatically the economy sank after the deadliest attack in U.S. history.

Many economists believe the economy is sinking deeper in the current quarter, forecasting economic output will fall at a rate of at least 1.5 percent.

"The economy was close to the bottom of a recession in the third quarter and was still heading down," said Wells Fargo chief economist Sung Won Sohn. "The fourth quarter should definitely be the worst and things should get better from there."

Sohn and other economists believe the GDP will move back up into positive territory in the first quarter of 2002, though growth is expected to be fairly anemic.

Economists hope that the Federal Reserve's aggressive interest rate cuts -- along with additional tax cuts and increased spending being contemplated by Congress -- will lead to a solid recovery by the second half of next year.

White House spokesman Ari Fleischer said the weaker GDP figure underscores the need for Congress to pass an economic stimulus bill, which has been hung up in the Senate.

On Wall Street, the Dow Jones industrial average rose 22.14 points despite the weaker third-quarter showing, to close at 9,851.56.

Whittled inventories

One of the biggest reasons the third-quarter GDP was revised downward was because businesses did a better job of getting rid of excess inventories of unsold goods.

While that's positive in the long run, setting the stage for companies to ramp up production in the future, the process subtracts from the GDP. In the third quarter, business inventory reduction totaled a record $60.1 billion and shaved 0.75 of a percentage point from economic output.