Treasury Says Economy Has Shrunk

Fallout from the terror attacks probably made the nation's economy shrink, but it's not clear whether there will be a recession, a senior Treasury official said Tuesday.

"The attacks added significant stress to an already sluggish economy," said Karen Hendershot, acting director of the Treasury Department's office of macroeconomic analysis. 

In early October, the Blue Chip consensus forecast for gross domestic product in the second half of this year was revised sharply: a decline at an annual rate of 1 percent rather than 2 percent growth, she said. 

"As a result, it now seems that some decline in real GDP is quite likely," said Hendershot who made her remarks to a group, including securities dealers, that advises Treasury on borrowing matters. 

The government will release GDP figures for the third quarter on Wednesday, and many analysts predict it will show that economic output declined at a rate of 1 percent in the July-September quarter. Most analysts also foresee another decline in output in the fourth quarter. A common definition of a recession is two consecutive quarters of falling GDP. 

While there is a broad consensus among economists that the country will tip into recession this year, Hendershot was circumspect. 

"Whether the ultimate drop is in fact deep enough, sufficiently widely dispersed and of long enough duration to qualify as a recession will eventually be determined by the National Bureau of Economic Research," the official arbiter of recessions, she said. 

A deterioration in the labor market suggests that economic "weakness is becoming more pervasive," she said, citing the loss of 117,000 service jobs during the third quarter alone, the first such decline since 1991. 

Also troubling, she said, was a big jump in weekly layoffs. 

Applications for home mortgages have been falling, pointing to the likelihood of reductions in residential construction, one of the few bright spots in the economy, Hendershot said. 

"The possibility that risks may still lie ahead cannot be discounted," she said.