U.S. Economy Probably Contracted as Consumer Spending Dropped

Oct. 30 (Bloomberg) — The U.S. economy probably shrank in the third quarter by the most since the 2001 recession just as Americans were deciding how to cast their ballots in the Nov. 4 elections.

Gross domestic product contracted at a 0.5 percent annual rate from July to September, according to the median forecast of 75 economists surveyed by Bloomberg News. The figure, the last major piece of economic data before the presidential election, compares with growth of 2.8 percent in the previous three months.

The economic slump coincided with Democratic presidential nominee Barack Obama‘s lead in public-opinion polls. A Bloomberg/Los Angeles Times survey taken Aug. 15-18 showed Republican nominee John McCain with 42 percent support to Obama’s 41 percent; five weeks later, as the credit crunch deepened, the poll showed Obama leading by 49 percent to 45 percent.

“There are multiple waves converging behind Obama,” said James Lucier, a senior political analyst at Capital Alpha Partners.

The Commerce Department’s GDP report is due at 8:30 a.m. in Washington; Bloomberg survey estimates range from a 1.2 percent rate of expansion to a contraction of 1.9 percent. The Federal Reserve yesterday warned of further “downside risks’ even after cutting interest rates twice this month and pumping billions of dollars into markets.

The Commerce Department’s report is due at 8:30 a.m. in Washington. Bloomberg survey estimates ranged from a 1.2 percent rate of expansion to a contraction of 1.9 percent.

Half-Century Low

The Fed yesterday cut the benchmark interest rate by a half percentage point to 1 percent, matching a half-century low.

“The intensification of financial-market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit,” the Fed’s statement said. “The pace of economic activity appears to have slowed markedly.”

The National Bureau of Economic Research, the Cambridge, Massachusetts-based official arbiter of U.S. economic cycles, has yet to call a recession.

The group bases its assessment on indicators including GDP, employment, sales, incomes and industrial production, and usually takes six to 18 months to make a determination. According to the NBER, the last recession lasted from March to November 2001.

CEOs See Recession

Chief executive officers from Ford Motor Co., Starwood Hotels & Resorts Worldwide Inc. and Caterpillar Inc. are among those in the past two months that have said the U.S. is in a recession.

“You might have a two- or three-quarter negative growth and then a slow pullout,” General Electric Co.’s Chief Executive Officer Jeffrey Immelt said in an Oct. 24 Webcast. Government efforts to improve liquidity will “take a while” to work. GE’s businesses, spanning jet engines, medical equipment and consumer finance, make it an economic bellwether.

Consumer spending, which accounts for more than two-thirds of the economy, fell at a 2.4 percent pace last quarter, the survey median shows. That would be the first drop since 1991 and the biggest since 1990.

“It was very much a quarter of transition from growth to a recession,” said Peter Kretzmer, a senior economist at Bank of America Corp. in New York. “The fourth quarter will be weaker. The credit crisis is at the center of everything.”

Appliances, Cookware

Whirlpool Corp., the world’s largest appliance maker, this week said it’ll cut 5,000 jobs, and forecast lower annual profit as the credit crunch clipped sales. Williams-Sonoma Inc., the biggest U.S. gourmet-cookware chain, yesterday forecast a third- quarter loss because sales slowed “significantly” during the past six weeks.

Industry figures showed cars and light trucks sold at a 12.5 million annual pace in September, the fewest since 1993. October sales may drop to an 11 million pace, according to a Deutsche Bank AG estimate.

“These are truly unimaginable times for our industry,” Robert Nardelli, chief executive officer of Chrysler LLC, said in a statement last week. The third-largest U.S. automaker will cut 25 percent of salaried workers and reduce production.

Home construction, which has subtracted from economic growth since the first three months of 2006, probably dropped again last quarter, economists said.

Trade, which made its biggest contribution to GDP in three decades in the second quarter, probably provided less support in the last three months, and may continue to moderate as overseas demand for U.S. goods cools. The U.K. economy contracted in the third quarter by the most since 1990, while Japan’s government acknowledged this month that the country has probably entered its first recession in six years.

                        Bloomberg Survey

================================================================
GDP Personal Initial
Annual Consump. Claims
QOQ% QOQ% ,000's
================================================================

Date of Release 10/30 10/30 10/30
Observation Period 3Q A 3Q A Oct. 25
----------------------------------------------------------------
Median -0.5% -2.4% 475
Average -0.6% -1.9% 474
High Forecast 1.2% 1.3% 485
Low Forecast -1.9% -3.5% 460
Number of Participants 75 14 41
Previous 2.8% 1.2% 478
----------------------------------------------------------------
4CAST Ltd. 0.1% --- 480
Action Economics -0.5% --- 475
AIG Investments -0.3% --- ---
Aletti Gestielle SGR -0.6% -3.0% 470
Argus Research Corp. 0.0% --- ---
Banc of America Securitie -0.5% --- ---
Bank of Tokyo- Mitsubishi -0.1% --- 475
Bantleon Bank AG -1.0% --- ---
Barclays Capital -0.5% --- 475
BMO Capital Markets -1.1% --- 485
BNP Paribas -1.3% --- 473
Briefing.com 0.3% --- 470
CIBC World Markets -0.7% --- ---
Citi -0.8% --- 470
ClearView Economics -1.9% --- ---
Commerzbank AG -0.8% --- 470
Credit Suisse 0.0% --- 480
Daiwa Securities America -0.8% --- ---
Danske Bank -1.2% -3.2% ---
DekaBank -0.3% -3.0% ---
Desjardins Group -0.3% --- 485
Deutsche Bank Securities -1.3% --- 485
Deutsche Postbank AG -0.1% --- ---
Dresdner Kleinwort -0.5% --- ---
DZ Bank -0.8% --- ---
First Trust Advisors -0.3% --- 482
Fortis -0.7% --- ---
FTN Financial -0.9% --- ---
Goldman, Sachs & Co. 0.0% --- ---
H&R Block Financial Advis -0.5% -2.3% 482
Helaba -0.5% --- ---
Herrmann Forecasting -0.3% --- 473
High Frequency Economics -1.0% --- 470
IDEAglobal -1.0% -1.1% 475
IHS Global Insight -0.2% -3.5% ---
Informa Global Markets -0.8% --- 470
ING Financial Markets -1.8% --- 480
Insight Economics -0.5% --- 475
Intesa-SanPaulo -1.1% --- ---
J.P. Morgan Chase -0.5% --- 475
JPMorgan Private Client -0.8% --- 475
Landesbank Berlin -0.6% --- 470
Landesbank BW 0.6% --- ---
Maria Fiorini Ramirez Inc -0.5% --- 470
Merk Investments -0.5% -0.9% ---
Merrill Lynch 0.5% --- 475
MFC Global Investment Man -1.0% -1.0% 470
Moody's Economy.com -0.5% --- 475
Morgan Keegan & Co. -1.3% --- ---
Morgan Stanley & Co. -0.6% --- ---
National City Corporation -0.3% -2.4% ---
Natixis -0.4% -2.5% ---
Newedge -1.2% -1.3% ---
Nomura Securities Intl. -0.5% --- ---
Nord/LB 0.4% --- 470
Okasan Securities -1.5% --- ---
PNC Bank -1.0% --- ---
RBS Greenwich Capital 1.2% --- ---
Ried, Thunberg & Co. -0.5% --- 475
Schneider Trading Associa 0.1% -0.9% 460
Scotia Capital -1.0% --- 480
Societe Generale 0.0% -2.5% ---
Standard Chartered -1.0% --- ---
Stone & McCarthy Research -0.8% --- 470
TD Securities -1.2% --- 460
Thomson Financial/IFR 0.5% --- 470
Tullett Prebon -0.5% --- 470
UBS Securities LLC -1.0% --- 475
Unicredit MIB 0.5% --- ---
University of Maryland -0.5% 1.3% ---
Wachovia Corp. -0.7% --- 460
Wells Fargo & Co. -0.8% --- 475
WestLB AG -0.7% --- ---
Westpac Banking Co. -0.5% --- 480
Wrightson Associates -0.5% --- 475
================================================================
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