U.S. economy took a tumble in the summer

updated 1:40 p.m. ET Nov. 25, 2008

WASHINGTON - The economy took a tumble in the summer that was worse than first thought as American consumers throttled back their spending by the most in 28 years, further proof the country is almost certainly in the throes of a painful recession.

The updated reading on the economy’s performance, released Tuesday by the Commerce Department, showed the gross domestic product shrank at a 0.5 percent annual rate in the July-September quarter.

That was weaker than the 0.3 percent rate of decline first estimated a month ago, and marked the worst showing since the economy contracted at a 1.4 percent pace in the third quarter of 2001, when the nation was suffering through its last recession.

GDP measures the value of all goods and services produced within the U.S. and is considered the best barometer of the country’s economic fitness.

“Consumers and businesses were like deer in the headlights ... frozen,” said economist Ken Mayland, president of ClearView Economics.

The new reading on GDP underscores just how quickly the economy deteriorated as housing, credit and financial crises intensified. The economy logged growth of 2.8 percent in the second quarter.

White House press secretary Dana Perino called the lower GDP figure “troubling” and said new government efforts announced Tuesday to boost the availability of auto and student loans, credit cards, home loans and other consumer lending — at cheaper rates — should eventually help spur more consumer spending.

On Wall Street, those new government efforts provided an early lift to stocks, but the Dow Jones industrials were down about 90 points in afternoon trading.

Meanwhile, the Federal Deposit Insurance Corp. said the list of banks it considers to be in trouble shot up nearly 50 percent to 171 during the third quarter — the highest level since late 1995. The FDIC also said that commercial banks and savings institutions suffered a 94 percent drop in third-quarter profits to $1.7 billion. Except for the fourth quarter of 2007, it was the lowest profit since the fourth quarter of 1990.

The FDIC does not reveal the institutions on its “troubled” list, but on average, about 13 percent of them end up failing.

Nine banks failed in the third quarter, decreasing the FDIC’s deposit insurance fund to $34.6 billion from $45.2 billion in the second quarter, both below the target minimum level set by Congress. There have been 22 bank failures so far this year compared with three for all of 2007. It’s expected that many more banks won’t survive the next year of economic tumult.

Elsewhere, the New York-based Conference Board said its Consumer Confidence Index for November rose to 44.9, from a revised 38.8 in October. Last month’s reading was the lowest since the research group started tracking the index in 1967 and Americans’ views on the economy remain the gloomiest in decades as they grapple with massive layoffs, slumping home prices and dwindling retirement funds.

To revive the economy, President-elect Barack Obama, who takes over on Jan. 20, says a top priority will be working with Congress to enact a massive stimulus package that he says will generate millions of new jobs.

The new, lower third-quarter GDP reading matched economists’ forecasts. The downgrade from the initial estimate mostly reflected an even sharper cut back in spending by consumers and less brisk sales growth of U.S. exports.

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