Posted on: Friday, November 30, 2001

Decline of economy

By Jeannine Aversa
Associated Press

WASHINGTON — The U.S. economy, which slipped into recession in March, was shrinking at an annual rate of 1.1 percent from July through September, the weakest showing in a de-cade.

The revised reading on Gross Domestic Product — the total output of goods and services produced within the United States — marked a much bigger drop than the 0.4 percent rate of decline estimated a month ago, the Commerce Department reported today.

The 1.1 percent rate of decline in the third quarter was the worst performance since the first quarter of 1991, when GDP decreased at a 2 percent rate.

Some analysts believe the current quarter will prove even weaker than the third quarter, forecasting economic output will fall at a rate of at least 1.5 percent.

The weak third-quarter performance reflected a sharp pullback in consumer spending and a continued plunge in business investment in new plants and equipment. The weakness resulted from both the Sept. 11 terror attacks and the sour economy.

One of the biggest reasons third-quarter GDP was revised downward was because businesses did an even better job of getting rid of excess inventories of unsold goods. In the third quarter, business inventory reduction totaled a record $60.1 billion and shaved off 0.75 percentage point from economic output.

The latest reading on GDP follows the official declaration Monday by the National Bureau of Economic Research that the country had tipped into a recession in March. That ended the longest expansion in U.S. history and began the first downturn in a decade.

To prevent the economy from sinking deeper into a recession, the Federal Reserve has cut interest rates 10 times this year, with many economists predicting another rate cut Dec. 11.

Today'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 economic slump. In the second quarter, profits declined at a 1.7 percent rate.

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.

Consumer spending, the lifeblood of the economy, rose at a rate of 1.1 percent, the smallest increase in eight years. That followed a 2.5 percent growth rate in consumer spending, which accounts for two-thirds of all economic activity.

The 1.1 percent rate of decline in third-quarter GDP came after the economy grew by a barely discernible 0.3 percent rate in the second quarter. The revised GDP figure shows just how quickly and dramatically the economy sank after the deadliest attack in U.S. history.