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In Tightfisted Turn, Economy Contracts

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By Neil Irwin and Lori Montgomery
Washington Post Staff Writers
Friday, October 31, 2008

Through recession, countless natural disasters and a major terrorist attack, there has been one constant in the U.S. economy: American consumers have bought more stuff in any given quarter than they did in the previous one.

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Not anymore. Personal consumption expenditures fell at a 3.1 percent annual rate in the third quarter, the government said yesterday, the worst decline since 1980. The data show that even before the financial crisis deepened in October, American households were being walloped to a degree that has no recent precedent. Conditions, economists said, are almost certain to get worse before getting better.

"This is a major about-face in consumer spending," said Robert A. Dye, a senior economist with PNC Financial Services Group. "It's no surprise why. We've had a drop in the value of houses and stock portfolios, a very weak labor market and a tightening of credit."

Overall, the nation's gross domestic product, the broadest measure of economic growth, declined at a 0.3 percent annual rate in the three months ended Sept. 30, the Commerce Department said. The economy would have shrunk even more had it not been for strong export growth and government spending, as well as a buildup in business inventories -- all factors that are poised to offer less of a boost in the future.

Analysts yesterday had been braced for even worse economic data, and the stock market rose following the announcement. The Dow Jones industrial average was up 190 points for the day, or 2.1 percent, amid some decent earnings reports and some signs of healing in the troubled credit markets.

Many analysts think the country is already in a recession -- although the panel of economists that makes such determinations has not yet ruled -- and that the economy will contract at perhaps a 3 or 4 percent annual rate in the final three months of the year.

The GDP figures gave new impetus to calls for a government stimulus package. Congressional Democrats are now considering crafting a spending proposal of around $100 billion, with the hope that -- if endorsed by President Bush and the president-elect -- the package could be passed next month and signed by the end of the year. Democrats may then consider another package in January, the third in 12 months, Rep. Barney Frank (D-Mass.) said.

Publicly, White House officials have not been particularly receptive to the idea of additional spending. But their rhetoric has softened in recent weeks, and political observers said there may be room for compromise, perhaps involving trade deals with Colombia and Panama, which are high priorities for Bush but opposed by many congressional Democrats.

"The White House has some things they want, like Colombia and Panama. So I think the opportunity is there," said John J. Castellani, president of the Business Roundtable, an association of 160 of the nation's largest companies, which joined the call for additional government stimulus spending.

Yesterday's economic data became grist in the presidential campaign. Sen. Barack Obama (D-Ill.) attributed the weak growth to Bush's policies, arguing that Sen. John McCain (R-Ariz.) would continue them. A top McCain aide said that Obama's tax policies would only exacerbate the slump.

The negative turn in consumer spending -- which accounts for more than two-thirds of U.S. economic activity -- shows how severely the financial crisis has affected Americans' ability to buy the goods they are used to buying. In the 2001 recession and aftermath of the terrorist attacks that year, by contrast, Americans kept spending despite millions of lost jobs.

There's one major difference now. In 2001, consumers could borrow money -- with credit cards, for example, and home equity lines of credit -- to get through bad times without necessarily curbing their overall spending. Now, credit is hard to get, which means many people cannot support standards of living artificially boosted by the now-ended lending boom. Those who suffer short-term setbacks have less ability to ride out the bad times.


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