Sept. 11 Dealt Sharp Blow to Output in U.S.

The ailing national economy, battered by a recession and the aftermath of terrorist attacks, suffered a 1.1% decline in its total output during the third quarter, the biggest drop in a decade, the Commerce Department reported Friday.

The revised figure reflected the bad business news from September, when a wave of fear swept the country after the terrorist attacks, delivering a blow to the tourism and travel industries.

The 1.1% decline was far worse than the preliminary estimate of 0.4% that had been issued for the July-September quarter. Friday’s report triggered renewed calls by the Bush administration for Congress to pass an economic stimulus package.

Despite the gloomy news, economists are hopeful that the nation’s businesses may already be moving through the downturn and are heading for a revival next year.

Since World War II, recessions usually have lasted eight to 11 months; the current downturn began in March. “Unless we are in a situation we haven’t seen before,” it is likely that the nation is well into the late phases of the recession, said Michael Swanson, senior economist at Wells Fargo & Co.

There are “good things” at work for the recovery, he said, noting that unemployment and inflation rates were at unusually low levels when the recession began. And oil prices have been in sharp decline recently, meaning that gasoline, heating oil, jet fuels and chemicals all are cheaper.

The economy also will be given a boost when Congress and President Bush agree on the final shape of an economic stimulus package, including tax cuts and spending measures that will put more dollars to work.

The Commerce Department said consumer spending, outlays by states and local governments and home construction all slowed during the third quarter, helping drive down the overall results for the gross domestic product--the most comprehensive measure of economic activity.

Inflation continued as a negligible factor. Prices fell at a rate of 0.2% during the quarter, compared with a rise of 1.3% in the second quarter.

The biggest casualty of the economic slump was the manufacturing sector, which has been in steady decline.

“Clearly, our economy is in deep trouble, and, given the volatile nature of the global environment, we are certain to see continued negative growth in the fourth quarter,” said Jerry Jasinowski, president of the National Assn. of Manufacturers.

Private investment plunged by 10.7% during the quarter, a sure sign that business executives were discouraged about sales prospects for their products. Companies forgo investing in factories, equipment and real estate when they see a gloomy sales potential.

“It is critical that the Congress and the administration act quickly to not only restore consumer confidence but, more importantly, to shore up the two components of the economy that are leading the downturn: investment and exports,” Jasinowski said.

As sales declined and demand slowed during the recession, companies trimmed their production of goods and have been drawing down their stockpiles of merchandise in warehouses and stores. “The present downturn is clearly a business-led recession,” he said.

Although consumer spending has slowed, it is still surprisingly strong for a recession. But businesses have been cutting back their output, closing assembly lines and stores. Often, they are drawing down stocks of merchandise in lieu of producing more goods.

Business inventories fell by $60.1 billion during the third quarter, the Commerce Department reported. The decline compared with a drop of $38.3 billion in the second quarter and $27.1 billion during the first three months of the year.

“There is a stage when you have to build inventories again,” said Tom Palley, deputy director of public policy for the AFL-CIO. The buildup comes when demand improves and businesses are convinced that sales will become healthier.

“That’s why it is so important to keep consumer spending up,” Palley added.

“Any fiscal stimulus should be directed at those who will spend and not those who will save,” he said, suggesting that the stimulus legislation in Congress should focus on workers and middle-income people who are more likely to spend any money they get from tax cuts, rather than upper-income Americans who would save any tax-cut windfall.