US growth revised down for third quarter

The US economy shrank at a faster rate than previously thought in the third quarter, and home prices fell at a record pace in the year to September, according to data out on Tuesday.

US gross domestic product contracted at a 0.5 per cent annual rate in the quarter, the commerce department said, compared with the earlier figure of 0.3 per cent, as consumer spending was weaker than the initial estimate.

Residential investment was also weaker than previously thought, while government spending, exports and spending on nonresidential structures were all stronger.

Personal consumption expenditures contracted at a 3.7 per cent annual rate, biggest decline in consumer spending since 1980. The updated third-quarter data compares with an initial estimate of 3.1 per cent drop in consumer spending, and comes after it grew by 1.2 per cent in the second quarter.

Many economists think the US is already in recession, although to meet the widely used definition of two consecutive quarters of contraction, the economy will have shrink again in the fourth quarter.

Among the main elements contributing to the contraction during the quarter were a "sharp downturn" in personal consumption expenditures and a "deceleration in exports", which occurred as the US dollar strengthened and global demand weakened.

The downward revision to growth was in line with expectations.

Corporate profits fell $14.6bn in the third quarter, the fifth quarterly decline in a row, compared with a decrease of $60.2bn in the second quarter.

The PCE chain price index was revised down to a 5.2 per cent rate from 5.4 per cent, signalling better news on inflation, although many economists are concerned that deflation is now the larger threat.

The growing slowdown in the US economy came as home prices in major US cities fell at the fastest pace on record in the year to the end of September, as higher foreclosure sales dragged down prices and the heightened credit crisis frightened away buyers.

"The turmoil in the financial markets is placing further downward pressure on a housing market already weakened by its own fundamentals," says David Blitzer, Chairman of the Index Committee at Standard & Poor's.

Prices of single family homes fell by a record 18.6 per cent in 10 big US cities compared with a year earlier and 17.4 per cent in 20 big cities. In the third quarter prices fell 16.6 per cent from the same period a year before.

Prices in September had returned to where they were in 2004, the report said.

The price declines are particularly worrying as they were probably only partly a result of the deepening of the credit crisis at the end of September, and do not account for the fallout in October and more recently.

"We have to be braced for even bigger price declines through the fall and winter; no bottom in sight," said Ian Shepherdson of High Frequency Economics.

The rates of decline were worst in Phoenix, which reported an annual drop of 31.9 per cent, followed by Las Vegas, down 31.3 per cent and San Francisco at -29.5 per cent. Dallas and Charlotte were the best-performing cities, losing just 2.7 per cent and 3.5 per cent, respectively.

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