National business
Quarterly output shrinks 0.4 %

By George Hager
USA Today

In the first official sign that the nation may have tipped into recession, government figures showed that the U.S. economy shrank in late summer for the first time since 1993 and at the sharpest rate since the 1990-91 recession.

Gross domestic product, the key gauge of the output of goods and services, fell at a 0.4 percent annual rate in the July-September quarter, according to the Bureau of Economic Analysis.

That was the first quarterly drop since a 0.1 percent decline in early 1993 and three back-to-back quarters in 1990-91, when GDP fell at a rate as great as 3.2 percent. In 1999 and 2000, by contrast, the economy boomed at a 4.1 percent rate.

The numbers confirm that "a recession has begun," says Bruce Steinberg, chief economist for Merrill Lynch, who forecasts that the downturn will last until spring before a strong rebound takes hold.

The rough definition of a recession is at least two consecutive quarters of economic contraction. Many economists expect GDP to fall in the October-December quarter as well.

Although the GDP number was negative, the 0.4 percent decline was milder than the 1 percent drop expected by economists. That muddied the view of what lies ahead.

Economists agree that a chief reason for the GDP drop was that businesses continued to slash bloated inventories much more aggressively than predicted.

"This inventory de-stocking cannot be sustained, or stocks will fall to levels that cannot meet customer demand," says Charles Lieberman, chief economist for Advisors Financial Center, predicting that factories will have to boost production.

But Merrill Lynch's Steinberg feels that higher production will be overwhelmed by "weakness in consumer and capital spending."