Economy, hit by attacks, shrinks at 1.1 percent rate in 3rd quarter, weakest in a decade

<br>WASHINGTON (AP) _ The U.S. economy, battered by the terrorist attacks, turned in its worst performance in a decade during the third quarter, shrinking at a rate of 1.1 percent. Many economists expect

Friday, November 30th 2001, 12:00 am

By: News On 6

WASHINGTON (AP) _ The U.S. economy, battered by the terrorist attacks, turned in its worst performance in a decade during the third quarter, shrinking at a rate of 1.1 percent. Many economists expect an even steeper drop in the current quarter but are hopeful for a turnaround next year.

The revised reading on gross domestic product released by the Commerce Department Friday showed the economy was much weaker in the July-September quarter than the 0.4 percent rate of decline estimated a month ago.

The 1.1 percent drop in GDP _ the total output of goods and services in the United States _ followed a barely discernible growth rate of 0.3 percent in the second quarter and illustrated just how quickly and dramatically the economy sank after the deadliest attack in U.S. history.

Many economists believe the economy is sinking deeper in the current quarter, forecasting economic output will fall at a rate of at least 1.5 percent.

``The economy was close to the bottom of a recession in the third quarter and was still heading down,'' said Wells Fargo chief economist Sung Won Sohn. ``The fourth quarter should definitely be the worst and things should get better from there.''

Sohn and other economists believe the GDP will move back up into positive territory in the first quarter of 2002, though growth is expected to be fairly anemic.

Economists hope that the Federal Reserve's aggressive interest rate cuts _ along with additional tax cuts and increased spending being contemplated by Congress _ will lead to a solid recovery by the second half of next year.

White House spokesman Ari Fleischer said the weaker GDP figure underscores the need for Congress to pass an economic stimulus bill, which has been hung up in the Senate.

On Wall Street, the Dow Jones industrial average rose 22.14 points despite the weaker third-quarter showing, to close at 9,851.56.

One of the biggest reasons the third-quarter GDP was revised downward was because businesses did a better job of getting rid of excess inventories of unsold goods.

While that's positive in the long run, setting the stage for companies to ramp up production in the future, the process subtracts from the GDP. In the third quarter, business inventory reduction totaled a record $60.1 billion and shaved 0.75 of a percentage point from economic output.

Economists believed the aggressive inventory liquidation bodes for a mild recession, barring further attacks or other extraordinary events.

``I think the recession will be ending sometime in the first quarter, probably by March, which would be a yearlong recession _ about the average length,'' said William Cheney, chief economist at John Hancock.

On Monday the National Bureau of Economic Research officially declared that the country had tipped into a recession in March. That ended the longest expansion in U.S. history and began the first downturn in a decade.

NBER's decision was based on a range of monthly economic statistics, from employment to industrial production, that it believes can better pinpoint business cycles than the quarterly GDP reports can.

The group stressed that even though it had picked March as the official start of the recession, the country might have been able to avoid a full-blown downturn had it not been for the Sept. 11 terror attacks.

In their aftermath, the nation's unemployment rate soared to 5.4 percent in October and consumer confidence plunged, hitting a 7 1/2-year low in November.

To prevent the economy from sinking deeper into a recession, the Fed has cut interest rates 10 times this year. Many economists predict another reduction Dec. 11.

Plunging business investment in new plants and equipment has been a main factor in the economic slump and contributed to the third-quarter weakness. This investment fell at a rate of 9.3 percent in the third quarter, on top of a 14.6 percent rate of decline.

Economic fallout from the attacks helped to bite into corporate profits. After-tax profits of U.S. companies fell at a rate of 7.1 percent in the third quarter, following a 1.7 percent rate of decline.

``The longer the profit drought persists the greater the risk is that this recession will broaden and deepen,'' said Wachovia Securities economist Mark Vitner.

Consumer spending, the lifeblood of the economy, rose at a rate of 1.1 percent, the smallest increase in eight years.

The third-quarter's 1.1 percent rate of decline was the weakest GDP performance since the first quarter of 1991, the depths of the previous recession.