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Data show clear signs of recession

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Reynolds and Hsu are Times staff writers.

The nation’s economy has shifted into reverse amid a staggering drop in consumer spending, the government reported. But that’s hardly news to furniture-store owner Chris Horn of Monterey Park.

Horn’s store saw business plummet 40% last month, when the financial crisis escalated and stocks plunged.

“Business was pretty steady up until then, but then it dropped off drastically,” said Horn, 58, the third-generation owner of Divine’s Furniture, which specializes in vintage pieces. “Customers are very reluctant to spend any money right now.”

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Consumers stepped on the spending brakes so hard, in fact, that the nation’s gross domestic product shrank 0.3% in the three months ended Sept. 30, the Commerce Department estimated Thursday.

That was the deepest decline in economic demand since 2001. Moreover, most economists believe it will be the first of at least two consecutive quarters of decline in GDP -- a widely accepted, if unofficial, definition of recession.

In total, personal consumption declined 3.1% in the third quarter, the Commerce Department said. It was the first time since 1991 that consumer spending dropped outright and was the biggest such decline since 1980.

The belt-tightening was led by a 14.1% drop in spending on big-ticket items such as cars and appliances and a 6.4% decline in smaller purchases.

Though the drop-off in consumer spending is bad for the economy, there’s at least one positive aspect: It means that more Americans have finally stopped living beyond their means, said Dean Baker, co-founder of the Center for Economic and Policy Research in Washington.

Baker noted that since the 1990s, consumers have been spending more than they should, because the tech-stock bubble and then the housing bubble of the last few years made them feel wealthier than they really were.

“When housing prices go through the roof, people consume more when they see there is more wealth in their homes. And they don’t save because they think their home is doing it for them,” Baker said.

Until the 1990s, households had a savings rate of about 8% a year. That declined to 2% by 2000 and has mostly stayed below 1% since 2004, including 401(k)s and pension funds, Baker said.

That means many people do not have enough savings to fund their retirement or a safety net if they lose their jobs.

“People should be thinking about how much money they need to put aside,” Baker said. “If you’re worried about your job, then by all means try to do what you can to build up a buffer. . . . People need to do what’s good for them, not what’s good for the economy.”

There are signs that consumers are beginning to save more. The savings rate shot up to 2.7% in the second quarter before slipping back to 1.3% in the third quarter, according to the Bureau of Economic Analysis.

Young Shin, 24, of Valencia is among those spending less and saving more. The biochemist has been seeing fewer movies, eating fewer meals in restaurants and shopping more on the Internet to save the expense of driving to stores.

And when he goes to Halloween parties this weekend, Shin will don a “ghetto Wolverine” costume he put together from $4 worth of materials. In years past, he would spend about $40 for a store-bought costume.

On a larger scale, Shin has also decided to put off big-ticket purchases like a new car or a big-screen television.

“I can afford it, but do I really need it?” he said. “Do I really want to buy this extravagant TV in this current situation? My friend, who was a nurse, was an inch away from buying a new Audi A5 car, but I convinced him not to get it. And a week later, he got laid off.”

Laurence H. Meyer, chairman of forecasting firm Macroeconomic Advisers, said economists expect things to get worse before they get better.

“The economy is sliding into recession and it has a way to go,” Meyer said, predicting that the decline will be about 2.75% in the fourth quarter.

“And it is likely to be relatively severe.”

The economic contraction is expected to lead into increased unemployment, as factories and other businesses lay off workers in response to declining demand for their goods.

The Labor Department reported Thursday that new applications for unemployment benefits remained elevated, totaling 479,000 for the second week in a row.

Meyer said he expected the nation’s unemployment rate -- currently at 6.1% -- to reach 7.5% sometime next year. The economy needs to grow at about a 2.5% pace just to create enough jobs to keep up with population growth, he noted, but he said that wasn’t likely to happen until the second half of 2009.

“Even if this economy turns the corner, unemployment will continue to rise,” he said.

The decline in consumer spending was partially offset by a 5.8% increase in government spending. Most of that came from an 18.1% increase in military spending.

David J. Berteau, a defense budget expert at the Center for Strategic and International Studies, said the sudden burst in military spending was probably tied to a long-awaited emergency war spending bill, which was passed after months of delay at the end of June.

In addition, Berteau noted, the military is one of the largest buyers of gas, and oil costs reached their high last summer, forcing the Pentagon to spend unprecedented levels on jet fuel and gas for tanks and trucks.

Nonmilitary federal spending rose 4.8%, and state and local governments increased their spending just 1.4%.

“The big plus in the report was government spending. That will continue to hold up,” said Gus Faucher, U.S. economist with Moody’s Economy.com, as Congress considers a second fiscal stimulus package. “But if you’re depending on government spending to keep the economy going, you’re in trouble.”

Joshua Shapiro, chief U.S. economist for MFR Inc., a New York forecasting firm, noted that exports rose 5.9% in the quarter, which added more than a full percentage point to the GDP figure. But that means domestic demand actually declined about 1.3%.

“All in all, we look for a recession that is both longer and deeper than those in recent memory, lasting at least through 2009,” Shapiro said in a note to clients.

The economy has been troubled since last year, when the effects of the housing crisis began to seep into the rest of the economy. The fourth quarter of 2007 posted a decline in GDP of 0.2%, and the first quarter of 2008 showed a tepid 0.9% increase.

An economic stimulus program, including tax rebate checks sent to most households, helped buoy the economy in the second quarter of this year, when GDP bounced up 2.8%. But the effects did not outlast the gas price shocks of the summer.

Economists say most of the decline in consumer spending took place in the last part of the quarter, as the financial crisis crested. Much of the damage from the credit crunch has yet to work its way through the rest of the economy.

“The unemployment rate lags the rest of the economy,” Faucher said.

“We expect growth to turn positive in the middle of 2009, but the unemployment rate won’t peak until the end of 2009 or the beginning of 2010. . . . But if things don’t turn around quickly in the credit markets, things will get even worse.”

Baker, of the Center for Economic and Policy Research, said the economy’s flagging performance would increase pressure on Congress to pass another package of government spending proposals designed to stimulate the economy.

“Without a stimulus, I think we could get to 10%” unemployment, Baker said.

“I think we’re going to see a recession that could be worse than the 1980s’ and perhaps the worst of the postwar period.”

Horn, the furniture-store owner, said he was taking steps to weather the downturn, cutting back on capital spending like buying tools and doing his best to keep his four employees productive.

He takes solace from the fact that the family business, which his great-uncle bought in 1924, survived the Great Depression.

“Eventually, I see our business slowly picking up again,” he said. “We’ll play it tight to the vest and be as conservative as we can and curtail spending. This is just a bump in the road.”

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Times staff writer Peter Spiegel contributed to this report.

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maura.reynolds@latimes.com

tiffany.hsu@latimes.com

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Stocks stage a late rally despite data

Share prices shoot up in the last 15 minutes of trading. The Dow gains 189 points. PAGE 4


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