The U.S. economy shrank in the third quarter at a 0.5 percent annual pace as the now year-old recession began to intensify. The contraction in gross domestic product from July through September, which matched the median forecast in a Bloomberg News survey, was the worst since 2001, according to revised figures from the Commerce Department today in Washington. Consumer spending fell the most in almost three decades. A lack of credit, declining home prices and cutbacks in consumer and business spending are projected to lead to an even deeper slump in the final three months of this year. President- elect Barack Obama and his economic team are working on a proposal for a stimulus package that could amount to about $850 billion to limit the damage and salvage or create 3 million jobs. “All incoming information points to a far worse outcome in the fourth quarter,” Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts, said before the report. Gault projects the economy will shrink at about a 6 percent pace in the last three months of 2008. Treasuries, which had fallen earlier in the day, remained lower. Yields on benchmark 10-year notes rose to 2.19 percent at 8:38 a.m. in New York, from 2.17 percent late yesterday. Final Estimate Today’s GDP report is the last of three estimates. The median forecast was based on a survey of 65 economists by Bloomberg News. Estimates ranged from declines of 0.4 percent to 0.8 percent. The economy grew at a 2.8 percent pace from April through June. The government revised down measures of prices and corporate profits for last quarter with today’s report. Profits, including estimates for the value of inventories and adjustments for capital investments, fell 1.2 percent compared with the previous three months, the seventh decline in the last eight quarters. From the third quarter of 2007, profits were down 9.2 percent, the biggest drop since 2001. The inflation measure tracked by Federal Reserve policy makers, which is tied to consumer spending and excludes food and fuel, rose at a 2.4 percent annual pace, down from the 2.6 percent gain previously estimated. The gauge has decelerated this quarter, raising concern the slump in growth would lead to deflation, or an extended and pernicious drop in prices. Consumer spending, which accounts for more than two-thirds of the economy, declined at a revised 3.8 percent annual rate, exceeding the 3.7 percent decrease estimated by the government last month. It was the first decline since 1991 and the biggest since 1980. Job Losses Americans may pull back further after employers cut 533,000 workers from payrolls in November, the most in three decades, and the unemployment rate jumped to 6.7 percent, the highest level since 1993. The auto industry has been one of the hardest hit by the slump in demand. Auto sales sank last month to the lowest level since 1982, according to industry figures. President George W. Bush last week announced that General Motors Corp. and Chrysler LLC will get $13.4 billion in initial government loans to keep operating while they restructure operations to return to profitability. Residential construction fell at a 16 percent pace, less than the prior estimate. Home starts and permits for future construction both dropped to record lows in November, according to Commerce figures, indicating housing will be an even bigger drag on growth this quarter. Trade Impact International commerce remained one of the few bright spots for the economy last quarter as a shrinking trade gap contributed to growth. Even that support is likely to fade as faltering global growth hurts American exports. Increases in government spending also prevented the economy from contracting even more in the third quarter. Public purchases rose at a 5.8 percent pace, the biggest increase in five years, led by a jump in defense outlays. The world’s largest economy will shrink this quarter at a 4.3 percent annual rate, the biggest contraction since 1982, and keep falling through the middle of 2009, according to the median estimate of 57 economists surveyed earlier this month. Four consecutive declines would be the longest economic slide since quarterly records began in 1947. Since the survey was taken earlier this month, economists at Morgan Stanley and JPMorgan Chase & Co. in New York are among those that boosted this quarter’s estimated pace of contraction to about 6 percent. U.S. companies are cutting jobs as global demand weakens. Electronic Arts Inc., the second-biggest video-game publisher, said last week that it will eliminate 1,000 jobs, or 10 percent of its workforce. The maker of “Madden NFL” lowered its full- year revenue and profit forecasts because of slow holiday sales in North America and Europe.

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