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U.S. economy shrinks
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October 31, 2001: 1:58 p.m. ET
Third-quarter GDP was negative, but better than analysts expected.
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NEW YORK (CNNmoney) - The U.S. economy shrank in the third quarter, its worst performance in more than 10 years, the government said Wednesday, as the United States edged closer to a recession.
And though the number was actually better than most economists expected, a recession is still seen as inevitable, keeping the pressure on President Bush and Congress to find a way to stimulate economic growth and soothe Americans' worries about the war on terrorism and the threat of future terror attacks.
"The number tells me a recession is coming, but it will be relatively mild in the wake of all the stimulus coming," said Anthony Chan, chief economist at Banc One Investment Advisors. "But I would caution investors not to be so complacent as to think this could be bottom. It's going to be a lot uglier in the fourth quarter."
Gross domestic product, the broadest measure of the world's largest economy, fell at a 0.4 percent rate in the quarter after growing at a 0.3 percent rate in the second quarter, the Commerce Department said in its first reading of the economy's third-quarter performance. Economists surveyed by Briefing.com expected GDP to fall by 1.0 percent.
The department also said its future revisions of the GDP number probably would not fall by more than 1.0 percent, meaning it was unlikely to fall below economists' initial forecasts.
Nevertheless, it was the weakest performance since the economy shrank 2.0 percent in the first quarter of 1991, at the end of the last recession. And economists said they still expect the fourth quarter to be much worse.
U.S. stock prices rose briefly after the better-than-expected report before giving up their gains in midday trading, while most Treasury bond prices jumped after the government said it was ending its use of 30-year bonds to raise money.
In a bid to keep consumers spending and avoid a recession, commonly defined as two consecutive quarters of negative GDP, the Federal Reserve has cut its target for short-term interest rates nine times this year, twice since the Sept. 11 terrorist attacks.
To boost consumer sentiment and spending, the Fed is widely expected to cut rates again when the central bank's policy makers meet on Nov. 6. Economists are split about how big the cut will be, but a slim majority seem to favor another half-percentage-point cut.
"There's no doubt the Fed will cut," Chan said. "We've had a lot of negative shocks. Fed policy has offset those negative shocks and will continue to do so. This (GDP) number will encourage the Fed to cut [a half-percentage point] instead of [a quarter percentage point.]"
Still, most economists think a recession this year is unavoidable, as the attacks and hundreds of thousands of job cuts have dampened consumer spending, which fuels two-thirds of GDP. Growth already was slowing well before the Sept. 11 attacks.
"I think we are in a recession. All the major indicators are not just declining, but have been declining for a while," Mickey Levy, chief economist at Bank of America, told CNNfn's Before Hours program.
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Banc of America Chief Economist Mickey Levy takes a look at the GDP numbers on CNNfn's Before Hours.
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But many economists also expect the Fed's aggressive rate-cutting, combined with what is likely to be a multi-billion dollar economic stimulus package from Congress, will help spur growth in 2002.
"Looking forward, the factors are in place for economy to rebound," Levy said. "Capital spending will stay in negative territory for a while, but I expect consumer spending to turn by the end of the year."
In its report, the department said that consumer spending rose at a 1.2 percent rate in the quarter, slower than the 2.5 percent pace in the second quarter.
But consumer confidence has been shaken by the Sept. 11 attacks and subsequent uncertainty about the economy, the war on terrorism and the threat of further terrorist attacks. As a result, most economists expect spending to fall in the fourth quarter, possibly into negative territory.
"Since the third quarter, we have seen mushrooming layoffs and bioterrorism at home," said Sung Won Sohn, chief economist at Wells Fargo & Co. "So the fourth quarter will bear the full brunt of the recession."
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And, though it's unlikely to be revised drastically, it's still possible that third-quarter GDP was worse than initial readings, as some data on business inventories, construction activity and other volatile GDP elements are missing from the initial estimate.
"Revisions have been substantial in the past," Sohn said.
Possibly seeking to boost confidence, Treasury Secretary Paul H. O'Neill, told reporters at a meeting of the National Association of Manufacturers (NAM) that he thought the economy could skirt a recession and grow in the fourth quarter if the government acts quickly to pass a stimulus package.
"I think if we can get this stimulus bill in place quickly, there's still a plausible argument that the fourth quarter could be mildly positive," O'Neill said.
President Bush, speaking at the NAM meeting, also urged Congress to come to a quick decision on a stimulus package. The House recently passed a bill that has been widely criticized by Democrats as giving too much money to corporations and not enough to spur consumer spending in the short term.
"The Congress needs to pass an economic stimulus package and get it to my desk before the end of November," Bush said.
The October unemployment report, due Friday, could set confidence back further. The unemployment rate held steady at 4.9 percent in September even as nearly 200,000 jobs were cut. Economists surveyed by Briefing.com expect 300,000 job cuts and an unemployment rate of 5.2 percent in October.
Separately, the National Association of Purchasing Management in Chicago said its index of manufacturing in the Chicago area fell to a seasonally adjusted 46.2 in October from 46.6 in September. Economists surveyed by Briefing.com were expecting a reading of 43.0. A reading below 50 indicates manufacturing activity shrank.
Manufacturing has been struggling for more than a year, bearing the brunt of a long slowdown in business spending. Wednesday's better-than-expected reading in the Chicago area was a hopeful sign, but it's still too early to declare a nationwide manufacturing recovery, economists said.
"It is unlikely that the region is really an oasis of activity in an otherwise bleak manufacturing landscape," said Steven Wood, economist at FinancialOxygen. 
- from staff and wire reports
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