Customers look at a Google T-Mobile G1 mobile telephone as they shop at a T-Mobile store on the day the new phone went on sale in New York City, October 22, 2008. [Agencies]
WASHINGTON – Scared and out of money, Americans stopped buying everything from cars to corn flakes in the July-September quarter, ratcheting back spending by the largest amount in 28 years and jolting the national economy into what could be the most painful recession in decades.
With retailers bracing for a grim holiday buying season, the economy isn't just slowing; it's actually shrinking, the government confirmed Thursday. It reported that the nation's gross domestic product declined at an annual rate of 0.3 percent in the year's third quarter and consumers' disposable income took its biggest drop on record.
In simpler words, "The train went off the tracks," said Brian Bethune, economist at IHS global Insight.
Wall Street took comfort in the fact that it wasn't even worse. The Dow Jones industrials rose 190 points.
But economists say tougher times are still 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 -- during the current October-December period. That would meet a classic definition of a recession -- two straight quarters of shrinking GDP.
Not that there's any real doubt now.
Clobbered by pink slips, shrinking nest eggs and falling home values -- consumers are holding ever tighter to their wallets. The new report said Americans' disposable income fell at an annual rate of 8.7 percent in the quarter, the largest in records dating back 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.
"The decline in GDP didn't happen by accident -- it is a direct result of the Bush administration's trickle down, Wall Street first, Main Street last policies that John McCain has embraced for the last eight years," Obama said. He pledged to provide tax relief to middle class families and help people facing foreclosure.
Pointing to the economy's sad state, Doug Holtz-Eakin, senior policy adviser for the McCain campaign, shot back that "Barack Obama would accelerate this dangerous course." McCain said his tax cuts, free-trade policies and help to struggling homeowners would help turn things around.
More than in recent recessions, consumers -- the lifeblood of the economy -- 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.
Walloped by such a huge pullback, the economy toppled into negative territory.