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U.S. economy shrinks 1.1%

November 30, 2001 Posted: 1908 GMT

NEW YORK (CNN/Money) -- The U.S. economy shrank at a faster pace in the third quarter than initially thought, the government said Friday, as the world's largest economy put in its worst performance since the last recession more than a decade ago.

U.S. gross domestic product (GDP), the broadest measure of the economy, contracted at a revised 1.1 percent annual rate in the third quarter, the Commerce Department reported. It was the worst quarter for GDP since it shrank 2.0 percent in the first quarter of 1991.

In its initial estimate of third-quarter GDP, the department said the economy shrank at a 0.4 percent rate after expanding 0.3 percent in the second quarter. Economists surveyed by expected third-quarter GDP to have shrunk by 0.8 percent.

"These numbers show the economy is indeed in recession, and they leave the door open for the Fed to cut rates again," Gary Thayer, chief economist at A.G. Edwards & Sons, told Reuters.

In a separate report, Chicago's purchasing managers said the region's manufacturing activity shrank at a faster pace in November, with its index tumbling to 41.1 from 46.2 in October, its 14th straight decline. The reading was much weaker than economists' forecasts for a slight decline.

"This shows manufacturing continues to get deeper into recession," said Sung Won Sohn, chief economist at Wells Fargo & Co.


On Wall Street, stock prices were mixed in afternoon trading while Treasury bonds were little changed.

To keep the economy from slipping into a recession, commonly defined as two straight quarters of shrinking GDP, the Federal Reserve has cut its target for short-term interest rates 10 times this year. Fed policy makers are widely expected to cut rates again after their meeting scheduled for Dec. 11.

Still, most economists have long thought a recession was inevitable, especially after the disruption of the Sept. 11 terrorist attacks. The National Bureau of Economic Research, which measures recessions and expansions in ways other than GDP, said this week that the economy sank into recession in March after 10 years of growth, the longest expansion on record.

Though the economy has apparently recovered somewhat from after Sept. 11, when commerce nearly ground to a halt for a few days, early data in the fourth quarter indicate that underlying weakness continues, and this is what most concerns the Fed, the nation's central bank.

The Fed's recent Beige Book report showed a broad-based slowdown in all 12 of the central bank's districts, the Conference Board's index of consumer confidence came in much lower in November than economists had expected, post-Thanksgiving retail sales were mixed and the number of people out of work is still rising.

"The (GDP) numbers are looking backwards," international economist Maria Fiorini Ramirez told CNNfn's Before Hours program. "The key is looking forward to the profit side for the next couple of quarters. That's really going to give a lift to the stock market, and it's also going to give a lift to the economy in terms of what consumers end up doing during the holidays and after, and, most importantly, what's happening on the job side."

Consumer spending is critical since it fuels two-thirds of the nation's economy.

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The major contributors to the drop in GDP were exports, which fell a whopping 17.7 percent, and business spending, which fell 10.7 percent. Imports also fell in the quarter, by 12.9 percent, boosting GDP.

The drop in exports in part reflects how other economies around the world are suffering along with the United States. Japan, the world's second-largest economy, is likely in recession, and the euro-zone economy grew at a paltry 0.1-percent rate in the third quarter.

There were some promising signs in the GDP report, including the fact that inventories were cut at a $60.1 billion rate during the third quarter, the sharpest drop for any quarter on record, meaning companies may have done much to get rid of their backlog of unsold goods.

Once inventories are cleared out, production – and hiring of new workers – can accelerate again and end a recession in manufacturing that has  lasted more than a year, as reflected in the Chicago manufacturing report. An index below 50 signals a contracting manufacturing economy, while a reading above 50 suggests expansion.

"Inventories really being run down to ground, but that means that any increase in demand in the future will be translated into more production and jobs," Sohn said. "We're feeling the pain right now, but it means we're more likely to get economic growth starting early next year."


In its report, the Commerce Department said consumer spending rose 1.1 percent after rising 2.5 percent in the second quarter. But economists worry that rising unemployment, which could pass 6.0 percent next year, will further hurt consumer confidence and limit the strength of the recovery that many expect sometime in the first half of next year.

The Fed also is watching confidence closely, and Fed governors this week talked about continuing to be aggressive to ease the cost of borrowing and make spending easier.

"We still don't really know how the consumer feels," said Robert Brusca, chief economist at Ecobest Consulting. "I don't think inventories are so much the problem any more. The key is to get some turnaround in [spending]."

When cutting rates, the Fed has to take care not to pump so much money into the economy to cause inflation, but that risk has been very distant this year. An inflation gauge tied to the GDP, which is watched closely by the Fed, fell 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 sluggish economy. Profits fell at a 1.7-percent rate in the second quarter, and they were weak for several quarters before that.

"The mystery is why this prolonged profit slump has not led to a larger cutback in consumer spending," Wachovia Securities economist Mark Vitner said in a research note. "The longer the profit drought persists the greater the risk is that this recession will broaden and deepen."

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 in the second quarter.

- from staff and wire reports


• Jobless claims jump
Nov. 29, 2001
• Beige Book shows more weakness
Nov. 28, 2001
• Confidence drops sharply
Nov. 27, 2001
• Modest gain in holiday shopping season
Nov. 27, 2001
• Economists say recession began in March
Nov. 26, 2001
• Fed cuts rates again
Nov. 6, 2001
• Unemployment up
Nov. 2, 2001

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