Economy Shrinks at 1.1 Percent Rate in Q3

WASHINGTON – The U.S. economy, which slipped into recession in March, was shrinking at an annual rate of 1.1 percent from July through September, the weakest showing in a decade.

The revised reading on Gross Domestic Product - the total output of goods and services produced within the United States - marked a much bigger drop than the 0.4 percent rate of decline estimated a month ago, the Commerce Department reported Friday.

The 1.1 percent rate of decline in the third quarter was the worst performance since the first quarter of 1991, when GDP decreased at a 2 percent rate.

Some analysts believe the current quarter will prove even weaker than the third quarter, forecasting economic output will fall at a rate of at least 1.5 percent.

The weak third-quarter performance reflected a sharp pullback in consumer spending and a continued plunge in business investment in new plants and equipment. The weakness resulted from both the Sept. 11 terror attacks and the sour economy.

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

While that's positive in the long run because it sets 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 off 0.75 percentage point from economic output.

The revised GDP estimate is based on better data.

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

"The president is troubled by the fact that the economy has shrunken again in these revised figures," Fleischer said. "The president believes that given this latest report it's just unimaginable that the Senate could possibly leave town without completing its work on the stimulus. He will continue to work closely with the Senate to help the Senate complete its work."

The latest reading on GDP follows the official declaration Monday by the National Bureau of Economic Research that the country had tipped into a recession in March. That ended the longest expansion in U.S. history and began the first downturn in a decade.

NBER's decision was based on a range of monthly economic statistics, from employment to industrial production, that it believes can better pinpoint business cycles than can the quarterly GDP reports.

The panel of six prominent academic economists stressed that even though they had picked March as the official start of the recession, the country might have been able to avoid a full-blown downturn had it not been for the Sept. 11 terror attacks.

In their aftermath, the nation's unemployment rate soared to 5.4 percent in October and consumer confidence plunged, hitting a 7 ½-year low in November.

To prevent the economy from sinking deeper into a recession, the Federal Reserve has cut interest rates 10 times this year, with many economists predicting another rate cut on Dec. 11.

Economists hope that the Fed's aggressive rate cuts along with additional tax cuts and increased spending being contemplated by Congress to revive the economy will pave the way for a recovery by the second half of next year.

The Fed has room to cut rates further because the weak economy has kept a lid on inflation. An inflation gauge tied to the GDP declined at an annual rate of 0.3 percent in the third quarter, compared with a 1.3 percent rise in the second quarter.

Friday's report also showed that after-tax profits of U.S. companies fell at a rate of 7.1 percent in the third quarter, reflecting the impact of the attacks and the economic slump. In the second quarter, profits declined at a 1.7 percent rate.

Business investment in new plants and equipment, which has been severely depressed for a year, fell at a rate of 9.3 percent in the third quarter, on top of a 14.6 percent rate of decline.

Consumer spending, the lifeblood of the economy, rose at a rate of 1.1 percent, the smallest increase in eight years. That followed a 2.5 percent growth rate in consumer spending, which accounts for two-thirds of all economic activity.

The 1.1 percent rate of decline in third-quarter GDP came after the economy grew by a barely discernible 0.3 percent rate in the second quarter. The revised GDP figure shows just how quickly and dramatically the economy sank after the deadliest attack in U.S. history.