011031; Economy Shrinks, Steepest Fall Since 1991

WIRE: 10/31/2001 9:00 am ET

Economy Shrinks, Steepest Fall Since 1991

By Caren Bohan

WASHINGTON (Reuters) - The U.S. economy recorded its sharpest contraction in more than a decade in the third quarter, the government said on Wednesday in a report likely to strengthen conviction the nation is in a recession.

Gross domestic product, the broadest measure of the country's economic health, shrank at an annual rate of 0.4 percent in the three months ended in September, the Commerce Department said.

Although Commerce was unable to quantify the impact of the Sept. 11 attacks on GDP, private economists have said disruptions stemming from the tragedy that killed some 4,800 people undoubtedly depressed economic activity.

The third-quarter GDP drop followed a meager 0.3 percent rise in the second quarter. If fourth-quarter GDP comes in negative as expected, the economy would meet the loose definition of a recession -- two straight quarters of falling GDP.

But in one potential hint of its resilience, the economy fared better than analysts had expected. Economists in a Reuters survey had projected a 1 percent drop.

"It's sort of a sigh of relief," said Eric Nickerson, currency strategist at Bank of America in New York. "The market was bracing for a -1.0 figure, and this looks a little encouraging...Everything still portends for a rather ugly fourth quarter."

The third-quarter contraction marked the steepest fall since the economy shrank 2 percent in the first quarter of 1991 amid the last official recession.

The last time GDP came in negative was in the first quarter of 1993 when it shrank 0.1 percent. But that was an isolated drop and was not followed by a subsequent quarterly contraction.

Consumer spending slowed to a crawl in the July-to-September period, edging up 1.2 percent. However, that small rise helped to partly offset an 11.9 percent slump in business spending on new plants and equipment. Business investment had already weakened well before the attacks and has fallen for three straight quarters.

Anecdotal reports have suggested both the business and consumer sectors took a hit after hijacked airplanes crashed into the World Trade Center and the Pentagon.

Cross-border trading and domestic transportation were disrupted, causing production problems at car plants and other factories.

Meanwhile, shell-shocked consumers canceled vacation plans and avoided restaurants and shopping malls as they stayed glued to their television sets.

While the mildness of the GDP decline may offer a ray of hope for markets, there was also some good news on the inflation front. The PCE price index, a barometer monitored closely by the inflation-wary Federal Reserve, fell 0.4 percent. That was skewed by insurance claims relating to the attacks but even with that impact filtered out, the index rose a mild 0.8 percent.