U.S. economy took a tumble in the summer

American consumers — the lifeblood of the economy — slashed spending in the third quarter at a 3.7 percent pace. That was deeper than the 3.1 percent cut initially reported and marked the biggest reduction since the second quarter of 1980, when the country was in the grip of recession.

Consumers are hunkering down amid job losses, tanking investment portfolios and sinking home values, which are making them nervous about spending.

Underscoring the strain faced by consumers, the report showed that Americans’ disposable income fell at an annual rate of 9.2 percent in the third quarter, the largest quarterly drop on records dating back to 1947. The government’s initial estimate had showed a record 8.7 percent decline in disposable income for the quarter.

Sales of U.S. exports grew at a 3.4 percent pace in the third quarter. That was lower than a 5.9 percent growth rate initially estimated and marked a sharp slowdown from the second quarter’s blistering 12.3 percent growth rate. The deceleration reflects less demand from overseas buyers coping with their own economic problems.

Home builders slashed spending at a 17.6 percent pace, marking the 11th straight quarterly cut and fresh evidence of the depth of the housing slump.

Meanwhile, a report on home prices released Tuesday and downbeat earnings results from homebuilder D.R. Horton, showed further deterioration in the housing market. The Standard & Poor’s/Case-Shiller U.S. National Home Price Index said that home prices tumbled a record 16.6 percent during the third quarter from the same period a year ago. Prices are at levels not seen since the first quarter of 2004.

Fort Worth, Tex.-based D.R. Horton Inc. reported a nearly $800 million loss in its fiscal fourth quarter on slower home sales and more than $1 billion in charges amid a battered housing market.

To help revive the economy, the Federal Reserve is expected to lower interest rates when its meets on Dec. 16, its last session of the year. Last month, the Fed dropped its key rate to 1 percent, a level seen only once before in the last half-century.

So far, though, the Fed’s rate reductions, a $700 billion financial bailout package and a flurry of other radical actions have been unable to break though a dangerous credit clog, restore stability to financial markets and help the sinking economy.

The nation’s unemployment rate is at 6.5 percent, a 14-year high, and will climb higher. Employers have cut payrolls every month so far this year and more losses are expected in the months ahead. The total of number of unemployed in October was just over 10 million, the most in 25 years.

Given all the stresses, consumers are expected to burrow further, making it likely the economy will continue to shrink through the rest of this year and into 2009, more than fulfilling a classic definition of a recession. That is, two straight quarters of contracting GDP.

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