The US economy probably contracted in the third quarter as business spending plunged and consumer spending cooled, pushing the nation toward its first recession in a decade, analysts said in advance of a government report yesterday.
Gross domestic product, the value of all goods and services produced, probably fell at a 1 percent annual rate from July through September after growing at a 0.3 percent pace in the second quarter, according to the median of 57 forecasts in a Bloomberg News survey.
The decline would be the largest since the first three months of 1991, when the economy was last in recession. Officials from such companies as Procter & Gamble Co and analysts say the economy may shrink again this quarter as fallout from the Sept. 11 terrorist attacks spreads through the nation.
"We are in recession," said Mark Zandi, chief economist at Economy.com in West Chester, Pennsylvania. "The ripple effects of the attacks are significant, and until a sense of personal safety is restored, the economy is going to struggle." A recession is commonly defined as two straight quarters of economic contraction.
The Commerce Department releases its GDP report at 8:30am Washington time. In the 1991 first quarter, the economy shrank at a 2 percent annual rate.
The report may give Federal Reserve policy makers more reason to push down interest rates at their Nov. 6 meeting. A reduction would be the third since terrorists crashed planes into the World Trade Center and the Pentagon, killing thousands and disrupting business nationwide. The Fed's target rate on overnight loans between banks, currently at 2.5 percent, is already the lowest since May 1962.
Also yesterday, the National Association of Purchasing Man-agement-Chicago may report that its regional manufacturing index contracted for the 12th consecutive month, falling to 43 in October from 46.6 during September, analysts said. That report is set for release at 10am Washington time. A reading below 50 in the index suggests that orders, production and other factory activity are declining.
Business investment in new facilities and equipment, which has fallen all year, probably plunged in the third quarter because companies already have more than enough computers and office space to meet existing demand, analysts said. Nortel Networks Corp, the biggest maker of phone equipment, reported that sales fell 45 percent during the July-September quarter as customers ordered less phone equipment.
Analysts also say that consumer spending, which has held up so far this year, probably cooled in the third quarter after the terrorist attacks kept shoppers away from malls, restaurants and airports. In September, retail sales fell 2.4 percent, the largest drop in almost 10 years, Commerce Department figures showed.
"We are sure there will be economic recession," said Alan Lafley, chief executive of Procter & Gamble, in a conference call yesterday after the largest US maker of household products reported a 4.4 percent drop in fiscal first-quarter earnings.
The looming recession has probably kept inflation from accelerating. The GDP price deflator, a measure of inflation tied to economic growth, probably rose at a 1.6 percent annual rate in the third quarter, the smallest gain since the final three months of 1999, after increasing at a 2.1 percent pace in the second quarter.
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