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.
Democrats on Capitol Hill are pushing for another economic stimulus package and are weighing whether to hold a lame duck session before the new president takes office.
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.
Ed Lazear, chairman of the Council of Economic Advisers, said the government is keeping close 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.
White House press secretary Dana Perino said that "not only rich people get dividend payments," which can form a significant portion of income for retirees and mutual funds.
A collapse of the housing market and locked-up lending have produced the worst financial crisis to hit the country in more than 70 years.
To cushion the fallout, the Fed slashed interest rates on Wednesday by half a percentage point to 1 percent, a level seen only once before in the last half century.
Fed Chairman Ben Bernanke has warned that the country's economic weakness could last for some time -- even if the government's unprecedented $700 billion financial bailout package and other steps do succeed in getting financial and credit markets to operate more normally.
"As of now, most forecasts indicate that we will experience a serious recession, perhaps comparable to the recession of the early 1980s, but nothing like the Great Depression," said Simon Johnson, former chief economist to the International Monetary Fund and senior fellow at the Peterson Institute for International Economics. During the 1980-1982 recession, unemployment topped 10 percent.
Other analysts, including Mark Zandi, chief economist at Moody's Economy.com, predicts the downturn will be much more severe than the 2001 and 1990-1991 recessions but not as bad -- in terms of unemployment or lost growth -- as the 1980s one.
The unemployment rate, now at 6.1 percent, could hit 8 percent or higher next year.
The Labor Department said Thursday that new claims for unemployment benefits last week held steady at 479,000, an elevated figure that continued to point to troubles in the jobs market.
In the third quarter, consumers cut back on purchases of cars, furniture, household appliances, clothes and almost everything else.
Businesses cut back, too, trimming spending on equipment and software at a 5.5 percent pace, the most since the first quarter of 2002. And home builders slashed spending at a 19.1 percent pace, marking the 11th straight quarterly cutback.
Slower growth for U.S. exports -- reflecting less demand from overseas buyers who are coping with their own economic problems -- also factored into the weak GDP report. Exports grew at a 5.9 percent pace in the third quarter, less than half the second quarter's 12.3 percent rate.