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Economy was shrinking in summer

WASHINGTON - The economy was shrinking in the summer and corporate profits were falling even before the financial crisis struck with full force. Analysts are forecasting that those small declines will be followed by much larger decreases this quarter as the longest recession in a quarter century gains intensity.

WASHINGTON - The economy was shrinking in the summer and corporate profits were falling even before the financial crisis struck with full force. Analysts are forecasting that those small declines will be followed by much larger decreases this quarter as the longest recession in a quarter century gains intensity.

The Commerce Department reported today that the gross domestic product, the broadest measure of economic health, declined at an annual rate of 0.5 percent in the July-September quarter, while corporate profits fell 1.2 percent.

The fall in GDP was unchanged from an estimate made a month ago. The decline in corporate profits was slightly larger than the 0.9 percent fall estimated a month ago.

Analysts believe that GDP, the economy's total output of goods and services, is falling at an even sharper pace in the current quarter, reflecting the fallout from the worst financial crisis to hit the country since the Great Depression.

Some believe the GDP plunge could be as large as 6 percent in the current October-December quarter, which would make it the largest decline since a 6.4 percent drop in the first quarter of 1982.

Many economists think this quarter could mark the low point of the recession, which is already the longest in a quarter century, having started in December 2007.

They are forecasting smaller GDP declines in the first and second quarter of next year before the economy starts growing again next summer. If the recession ends in June 2009, as many economists are forecasting, it would have lasted 18 months, making it the longest recession in the post-World War II period.

The 0.5 percent drop in GDP in the third quarter followed a 2.8 percent increase in the spring, a period that was boosted by the distribution of millions of economic stimulus payments.

President-elect Barack Obama favors a massive second stimulus measure of around $850 billion, which Obama is pushing Congress to pass early next year to limit the severity of the downturn.

For the government's last look at third quarter GDP, there were only minor revisions. Spending by consumers plunged at an annual rate of 3.8 percent, slightly larger than the 3.7 percent fall reported a month ago. It was the biggest decline in consumer spending, which accounts for two-thirds of economic activity, in nearly three decades, since an 8.6 percent drop in the second quarter of 1980.

Residential construction, where the current economic troubles began, fell at an annual rate of 16 percent in the third quarter, while non-residential construction, which had been buffering the construction industry, faltered as well, dropping by 1.7 percent.

The 1.2 percent fall in corporate profits followed a 3.8 percent drop in the spring and represented the fifth straight quarter that corporate profits have fallen.

The National Bureau of Economic Research has said that the country slipped into a recession in December 2007. In the October-December quarter of 2007, the GDP was falling at an annual rate of 0.2 percent. GDP then grew by 0.9 percent in the first quarter and 2.8 percent in the second quarter before falling by 0.5 percent in the third quarter.

While the common rule of thumb for a recession is two consecutive quarters of falling GDP, the NBER uses other data to determine when recessions begin and end including employment statistics. The economy has lost jobs every month since January, shedding 1.9 million payroll jobs this year, including more than a half-million jobs lost in November alone. The unemployment rate now stands at a 15-year high of 6.7 percent.

Congress enacted a $700 billion rescue program in October, and the Federal Reserve has expanded its loan programs by hundreds of billions of dollars as the government has tried to combat the credit crisis. But all those efforts have so far failed to prompt banks to resume more normal lending patterns.

As a consequence, many businesses are struggling to attract the financing they need. The weakness is spreading around the world, which has been bad for U.S. exports.

Peoria, Ill.-based Caterpillar, the world's largest maker of mining and construction equipment, said Monday that it would cut executive compensation by up to 50 percent next year due to slower demand amid the global economic downturn, becoming the latest of several large firms to slash compensation in an effort to lower costs.

Earlier this month, Memphis, Tenn.-based FedEx Corp. said it would cut pay for senior executives and freeze 401(k) contributions for a year, while AK Steel Holding Corp. of West Chester, Ohio, said it planned to reduce pay for salaried employees by 5 percent in 2009.

The recession already is the longest since the 1981-82 slump, which lasted 16 months.

Rep. Barney Frank, chairman of the House Financial Services Committee, said Monday that he is preparing legislation to require that some of the bailout money be spent for specific purposes, such as stemming foreclosures and reducing mortgage rates. Frank is pushing to get the second half of the $700 billion rescue fund released next month, before President-elect Barack Obama is inaugurated.

Frank's bill would impose tighter restrictions on the second $350 billion, such as requiring banks to report on their new lending every quarter and toughening limits on executive compensation. Many U.S. banks have received federal capital in an effort to stimulate lending.