GDP Contracted as Spending Fell: U.S. Economy Preview
By Shobhana Chandra
Oct. 26 (Bloomberg) -- The U.S. economy shrank last quarter for the
second time in a year as consumers and companies pulled back, reports
this week may show.
Gross domestic product contracted at a 0.5 percent annual rate from
July to September, the biggest drop since the 2001 recession,
according to the median estimate in a Bloomberg News survey ahead of
Commerce Department figures due Oct. 30.
Consumer spending, the biggest part of the economy, probably dropped
by the most in almost two decades as job losses mounted, stock prices
sank and property values plummeted. Federal Reserve policy makers,
meeting this week, are forecast to lower interest rates for a second
time this month to try to thaw frozen credit markets and prevent a
deepening recession.
``I don't see how the consumer can do anything but retrench,'' Robert
McTeer, former president of the Fed Bank of Dallas, said in an Oct. 24
Bloomberg Television interview. ``If they all do it at the same time,
it will really tank the economy.''
The projected economic contraction would follow a growth rate of 2.8
percent in the second quarter. The economy shrank at a 0.2 percent
pace in the last three months of 2007.
Economists also forecast consumer spending dropped at a 2.4 percent
pace last quarter, the first decline since 1991 and the biggest since
1990, according to the survey median.
Purchases fell 0.2 percent in the final month of the quarter after
stalling in August, a Commerce report Oct. 31 is projected to show.
Incomes likely grew 0.1 percent, a fifth of the gain in the prior
month.
Growing Pessimism
Consumer sentiment probably plunged this month as stocks crashed,
raising the risk the slump in spending will be even worse this
quarter. The Conference Board's consumer confidence index, due on Oct.
28, probably fell to 52 from 59.8 in September, the survey median
showed.
The International Council of Shopping Centers predicts the November-
December holiday season, which brings in more than a third of some
retailers' annual sales, will be the worst since 2002.
Wal-Mart Stores Inc., the world's biggest retailer, is seeing
consumers use credit cards less often because they are ``feeling the
pain'' of the financial crisis, said Eduardo Castro-Wright, the
company's U.S. stores chief. Americans feel ``maxed out,'' he said in
a speech in Los Angeles on Oct. 21.
Household wealth is disappearing as foreclosures drive down home
prices. Home values in 20 U.S. cities fell in August at the fastest
pace on record, economists forecast figures from S&P/Case-Shiller on
Oct. 28 will show.
Fewer Sales
Sales are still dropping as stricter lending rules and concern that
property values will keep plunging scare off prospective buyers. A
Commerce report tomorrow may show purchases of new homes fell in
September to a 17-year low, according to the Bloomberg survey median.
The squeeze on credit and faltering overseas demand is hurting U.S.
manufacturers. The Commerce Department may report on Oct. 29 that
orders for durable goods, those meant to last several years, fell in
September for the second consecutive month, according to the Bloomberg
survey.
Policy makers will likely focus on the risks to growth when they meet
on Oct. 28-29 as the economic slowdown has depressed oil prices and
eased concern about inflation.
The benchmark rate will be cut by a half point to 1 percent, according
to economists surveyed. Trading in financial futures indicates there
is about a one-in-four chance the rate will be reduced by three-
quarters of a point to 0.75 percent, the lowest level in the two
decades since policy makers established an explicit federal funds
target.
Bloomberg Survey
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