WASHINGTON - Scared and out of money, Americans have stopped buying everything from cars to cornflakes, ratcheting back spending by the largest amount in 28 years.
Through recession, countless natural disasters and a major terrorist attack, there has been one constant in the U.S. economy: American consumers have bought more stuff in any given quarter than they did in the previous one.
Not anymore. The economy isn't just slowing; it's shrinking, the government confirmed Thursday. It reported that the nation's gross domestic product in the July-September quarter declined at an annual rate of 0.3 percent in the year's third quarter and that consumers' disposable income took its biggest drop on record.
And that was before the financial crisis deepened in October.
Wall Street took comfort in the fact that it wasn't even worse. The Dow Jones industrials rose 190 points.
"It's no surprise why" consumers are cutting back, said Robert Dye, a senior economist with PNC Financial Services Group. "We've had a drop in the value of houses and stock portfolios, a very weak labor market and a tightening of credit."
With retailers bracing for a grim holiday buying season, economists say tougher times are ahead. Believing consumers are cutting back even more right now, they predict a much larger economic decline - anywhere from a 1 to 2 percent rate - from October to December. That would meet a classic definition of a recession: two straight quarters of shrinking GDP.
The new report said Americans' disposable income fell at an annual rate of 8.7 percent in the quarter, the largest in records dating to 1947.
The dismal news came just days before the nation picks the next president. Whether Democrat Barack Obama or Republican John McCain wins the White House, he will inherit a deeply troubled economy and a record-high budget deficit that could cramp his spending plans.
Each side said the new figures supported its political case. Sen. Barack Obama attributed the weak growth to Bush's policies, arguing that Sen. John McCain would continue them. A McCain aide said Obama's tax policies would exacerbate the slump.
More than in recent recessions, consumers are bearing the brunt of the country's housing, banking and other ailments. The third-quarter decline in their spending was the first in 17 years, and the 3.1 percent annualized cutback was staggering - the most since the spring of 1980, when the country was in the grip of what some call the worst downturn since the Great Depression.
The negative turn in consumer spending - which accounts for more than two-thirds of U.S. economic activity - shows how severely the financial crisis has affected Americans' ability to buy the goods they are used to buying. In the 2001 recession and aftermath of the terrorist attacks that year, by contrast, Americans kept spending money despite millions of lost jobs.
There's one major difference between then and now. In 2001, consumers could borrow money - with credit cards, for example, and home equity lines of credit - to get through bad times without necessarily curbing their overall spending. Now, credit is hard to get
Even spending on nondurable goods - food, clothing and items that are expected to last less than three years - fell 6.4 percent.
A rapid turnabout
The latest reading on GDP, which measures the value of all goods produced within the United States, showed a rapid turn from the 2.8 percent growth rate logged in the second quarter. The new figure was the worst since the 1.4 percent rate of decline in the third quarter of 2001, when the nation was suffering through its most recent recession.
The GDP figures gave new impetus to calls for a government stimulus package. Congressional Democrats are now considering crafting a spending proposal of around $100-billion, with the hope that - if endorsed by President Bush and the president-elect - the package could be passed next month and signed by the end of the year. Democrats may then consider another package in January, the third in 12 months, said Rep. Barney Frank, D-Mass.
Edward Lazear, chairman of the Council of Economic Advisers, said the White House remains skeptical of Democratic proposals for a second economic stimulus this year. "We don't believe that's the right way to go."
Bush administration officials say the contraction was expected and argue that continued implementation of the $700-billion federal rescue plan that Congress approved last month will eventually stabilize the chaotic credit markets at the heart of the financial crisis. The bailout plan, Lazear said, is "the appropriate stimulus right now."
Under attack from Democrats and Republicans alike, the White House defended giving billions of bailout dollars to banks that now are rewarding shareholders and executives - or even buying other banks - rather than making loans to consumers and businesses.
Lazear said the government is keeping tabs on banks' use of the money, but he also said normal activities such as paying performance-related salaries or distributing dividends are allowed under the law Congress passed.
The reversals mount
Utilities: Tampa Electric lost more customers than it added in the third quarter, an unprecedented reversal that slashed the utility's profits and promises to delay plans for new power plants.
Home starts: Builders started just 1,155 homes in the quarter that ended Sept. 30. That's down 81 percent from the peak of 6,162 housing starts in the first quarter of 2006.
GDP: The gross domestic product, the broadest measure of economic growth or contraction, fell at an annual rate of 0.3 percent for July-September, its worst drop in seven years.
Spending: Americans' disposable income fell at an annual rate of 8.7 percent in the last quarter, the largest in records dating back to 1947.