Gross domestic product (GDP) figures released yesterday by the Commerce Department show that the US economy shrank by 0.3 percent on an annualised basis in the three months from July to September. With economists expecting even poorer GDP figures for the fourth quarter, the latest data confirms that the economy has now entered into severe recession.

Negative GDP growth for the third quarter was driven by a 3.1 percent decline in consumer spending, the first such contraction since 1991 and the largest fall recorded since 1980.

Consumer spending, partly fuelled by personal debt, has accounted for more than two-thirds of all economic activity in the last period. But mounting layoffs, home foreclosures, credit card defaults, the rising cost of living and the declining value of retirement savings have had a devastating impact on broad layers of the population. The Commerce Department reported an extraordinary 8.7 percent third quarter decline in disposable personal income—that is, income after taxes and adjusted for inflation. This is the largest fall ever recorded since figures were first kept in 1947.

Unsurprisingly, spending has declined together with incomes. In the three months up to October, purchases of non-durable goods—smaller purchases such as food and clothing items—plunged by 6.4 percent, the biggest decline since 1950. Spending on durable goods, such as cars and furniture, declined by 14.1 percent.

The third quarter 0.3 percent GDP decline was not as severe as had been anticipated. Stock markets lifted marginally yesterday, with the Dow Jones closing 2.1 percent higher. Goldman Sachs economists, however, warned their clients that the GDP report was “weaker than implied by the initial market reaction.”

The data would have been significantly worse had it not been for a narrower trade deficit caused by continuing export growth to Europe and Asia. This growth has since ceased and exports are in decline as the world economy follows the American into steep recession. Also preventing a sharper drop in third quarter GDP was federal government spending and investment, which was up 13.8 percent on an annualised basis, largely due to an 18.1 percent rise in military expenditure.

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