By Lucia Mutikani
WASHINGTON (Reuters) — The U. S. economy contracted at its fastest pace in seven years in the third quarter as consumer spending plunged to a 28-year low, data showed on Tuesday, raising the specter of a deeper recession.
Separate reports showed U. S. home prices continued their downward spiral, with the cost of single-family homes plunging by a record 17.4 percent in September from a year earlier.
The data painted a dismal picture of the troubled economy and backed views the Federal Reserve could push benchmark lending rates to an unprecedented zero percent by early 2009.
"We are in the early stages of one of the worst recessions in the post-war period, even factoring in a massive stimulus program, ' said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts.
The grim reports partially overshadowed the Fed's announcement that it would use up to $800 billion to buy mortgage-related debt and consumer debt securities. The Dow Jones industrial average ended up 36.47 points at 8,479.86, after a choppy session.
U. S. government debt prices rallied, helped by a safe-haven bid fueled by the worsening outlook. The dollar, however, fell a third session against the euro, handing the European single currency its best three-day percentage advance ever.
The Commerce Department revised the annual rate of decline in third-quarter gross domestic product to 0.5 percent from the 0.3 percent that it reported a month ago. It was the sharpest fall in GDP since the third quarter of 2001, in the aftermath of the September 11 attacks.
Corporate profits dropped for a second straight quarter and business investment fell for the first time since the end of 2006, signaling a wariness about prospects for future sales.
Consumers, hard hit by rising unemployment and plunging home equity, held back and sent spending falling at its sharpest rate since the second quarter of 1980. Consumer spending accounts for two-thirds of economic activity.
Many analysts believe the United States already has joined Europe in recession, though it will take another quarter of contraction to meet a widely used definition for it — back-to-back quarters of declining output.
The third-quarter decline in GDP was a striking contrast with the second quarter's relatively brisk 2.8 percent rate of growth. The U. S. economic decline is widely predicted to accelerate in the fourth quarter and last into 2009.
CREDIT CRISIS TO BLAME
The White House blamed the contraction in the economy on the credit crisis that has emanated from the collapse of the U. S. housing market.
"There's no question the financial crisis was a major shock to the economy, and that's being reflected in the economic data. We believe a big reason for this was the freezing in credit markets this fall, " said White House spokesman Tony Fratto.
"That's why we've been so focused on unfreezing our credit markets and stabilizing our financial system. " Continued…
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