WASHINGTON (AFX) - The US economy contracted at a 0.4 pct annual rate in the third quarter, the Commerce Department said. This is the first decline in US GDP since the Q1 1993 and is the largest decline since Q1 1991, when the economy was last in recession. The advance forecast of Q3 GDP growth was above expectations of Wall Street economists who had expected the economy to contract by 1.3 pct.
Final sales -- GDP growth minus inventory behavior -- were unchanged in the third quarter, down from a 0.7 pct rise in the second quarter. Inflation data in the Q3 GDP report were impacted sharply by insurance benefit pay outs related to the Sept 11 attacks, the department said. These pay outs raised the estimate for the chained weighted price index and lowered the consumption index, a Commerce spokesman said. The GDP chain weighted price index rose 2.1 pct, the same as the second quarter.
Excluding food and energy prices, the GDP chain-weighted index rose 2.6 pct, down from a 1.2 pct rise in the second quarter. This is the highest core rate since Q1 2000. The consumption price index fell 0.4 pct in the third quarter, compared with a 1.3 pct rise in the second quarter. This is the first decline since the second quarter of 1961.
Excluding the insurance-related effects, the consumption price index rose 0.8 pct in the third quarter, the department said. Excluding food and energy prices, the PCE price index was up 0.3 pct, compared with a 0.7 pct gain in the second quarter. This is the smallest increase since the government began collecting the data in 1959.
The deceleration in the economy was caused by slowing consumer spending, a decline in household and business investment and further draw down in inventories. This was partially offset by a sharp drop in imports, which is a positive for GDP. Businesses subtracted 50.4 bln usd from inventories in the third quarter, compared with a 38.3 bln decline in the prior quarter. This is the third consecutive quarter of inventory reduction. The real change in business inventories subtracted 0.37 percentage points from Q3 GDP growth, after subtracting 0.42 percentage points during the second quarter.
Consumer spending in the third quarter rose 1.2 pct, after a 2.5 pct rise in the previous quarter. This is the smallest quarterly gain in consumer spending since the first quarter of 1993. Business fixed investment fell 11.9 pct, compared with a 14.6 pct drop in the second quarter. This is third straight quarterly decline in business fixed investment. Overall, business and household investment fell 10.7 pct after a 12.1 pct drop in the previous quarter. This is the fifth consecutive quarterly decline.
Equipment and software investment fell 11.8 pct in the third quarter after a 15.4 pct drop in the second quarter. Trade added 0.32 percentage points to Q3 GDP growth, after subtracting 0.12 percentage points from Q2 GDP growth. Exports fell 16.6 pct, compared with a 11.9 pct decline in the second quarter. Imports fell 15.2 pct, compared with a 8.4 pct decline in the second quarter. Government spending added 0.32 percentage points to Q2 GDP growth. Federal and state and local government spending rose 1.8 pct in the third quarter after rising 5.0 pct in the second quarter. The personal savings rate - saving as a percentage of disposable personal income - rose 3.8 pct in the third quarter, up from 1.1 pct in the second quarter. Commerce said that the economic effects of the terrorist attacks on Sept 11 are included in the Q2 GDP data, but did not attempt to quantify the total impact because most of the effects cannot easily be separated out,
This is the first estimate of Q3 GDP growth. The data will be revised twice before it becomes final. In this estimate, the Commerce Department assumes a sharp drop in imports and exports in September and a small increase in September wholesale and retail inventories.