U.S. gross domestic product shrank by 0.3 percent in the third quarter, the Commerce Department announced this morning, the first time it contracted since the quarter that included the Sept. 11 attacks seven years ago. It was a lower than expected decline, but I found this particularly troubling, from the Reuters account:
Consumer spending, which fuels two-thirds of U.S. economic growth, fell at a 3.1 percent rate in the third quarter — the first cut in quarterly spending since the closing quarter of 1991 and the biggest since the second quarter of 1980. Spending on nondurable goods — items like food and paper products — dropped at the sharpest rate since late 1950.
The economic boom that we enjoyed for most of the Bush years was fueled in large part by the housing market, both because those who saw their houses rise in value felt richer and were more willing to spend money and because low interest rates allowed many Americans to refinance their mortgages and spend the money they saved paying off their mortgages. Now the reverse is taking place, and I think we’re in the early stages of the economic decline, with the rest of the economy not yet having absorbed all of the tumult on Wall Street. At this point, we’re still a long way to go from a depression, during which you’re looking at double digit contraction of the GDP.
As for the presidential race, I noted at the beginning of the month that we should all beware of the GDP bomb set to go off less than a week before the election. That is why, for all my criticism of McCain in the past few months, I’m willing to acknowledge that the campaign was largely taken over by events that were beyond his control. There’s not much precedent for the incumbent party winning a third straight presidential term in the early stages of an economic contraction.