Consumer Spending Falls 0.3 Percent in September

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.

The result: The freight train of American consumption has been derailed. Purchases of durable goods fell at a remarkable 14.1 percent annual pace, as Americans pulled back on their demands for automobiles, home appliances and other big-ticket items that often require credit to purchase.

Even spending on nondurable goods -- food, clothing and items expected to last less than three years -- fell 6.4 percent.

Exports proved to be a major bright spot in the report, rising at a 5.9 percent annual pace. But that growth was driven by two trends that seem to be dissipating. First, economies in the rest of the world are deteriorating rapidly, meaning foreigners will be less able to buy American goods in the months ahead. And the value of the dollar has been rising relative to other currencies in recent weeks, making U.S. exports less competitive on price.

"We're entering a global recession, so it's hard to imagine net exports giving much of a positive boost down the road," said Jay Bryson, a global economist at Wachovia.

Government spending, which grew by 5.8 percent, also kept the overall GDP number from being more negative than it was. But the growth there could be misleading. The strongest gains were in defense spending, which is highly volatile quarter-to-quarter. And state and local governments spent more money, a trend that might reverse itself as many face budget crunches in the coming year.

"The underlying data in this report is weaker than the headline number would suggest," Bryson said. "We're going to get a nasty number in the fourth quarter."

Economists testifying yesterday before Congress's Joint Economic Committee said the new GDP numbers reflect a recession that began earlier this year and is likely to last through 2009. New York University economist Nouriel Roubini predicted that it would be the nation's worst downturn since the 1930s.

"When it walks and quacks like a recession duck, it is a recession duck," Roubini told lawmakers, citing depressed economic growth, rising unemployment and grim news from nearly all sectors of the economy.

Both Roubini and Simon Johnson, former chief economist at the International Monetary Fund, urged Congress to act quickly to approve a massive injection of federal funds -- at least $300 billion, Roubini said, and as much as $450 billion, according to Johnson -- to offset the contraction in economic activity.

"This fiscal stimulus should be voted on and spent as soon as possible, as delay will make the economic contraction even more severe," Roubini said in his written testimony. "A stimulus package legislated only in February or March of next year when the new Congress comes back will be too late."