Economy: Biggest drop in 7 years

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NEW YORK (CNNMoney.com) -- The troubled U.S. economy posted its biggest drop in seven years, according to a government report Tuesday.

The gross domestic product, the broadest measure of the nation's economic activity, declined 0.5% in the three months ending Sept. 30, according to the Commerce Department.

This was in line with estimates from economists surveyed by Briefing.com.

The original reading showed a 0.3% decline.

The third quarter drop was the biggest for the economy since a 1.4% decline in the third quarter of 2001, the last full quarter that the U.S. economy was judged to be in a recession.

While there has yet to be an official determination that the economy is currently in a recession, most economists believe the U.S. is already in one and that the economy is likely to continue to shrink in the fourth quarter and the beginning of 2009.

The economy took a huge hit from a pullback in consumer spending in the quarter. Spending by individuals, rather than businesses or governments, accounts for about 70% of the nation's economic activity and remained strong enough in the most recent recession of 2001 to allow that downturn to be relatively mild.

But in the third quarter spending by consumers plunged by nearly $80 billion, or 3.7%, the biggest percentage drop in 28 years. And early readings on spending in October suggest that spending and the economy as a whole will be even weaker in the fourth quarter, hit by tight credit, rising job losses and low levels of consumer confidence.

"Everyone is waiting for the hammer blow that weak auto sales is delivering to fourth-quarter growth," said Robert Brusca of FAO Economics.

But it wasn't just weak consumer spending dragging the economy down in the third quarter. Business equipment spending tumbled 5.7% while investment in housing slumped 17.6%.

Just ahead of the report, the Treasury Department and Federal Reserve announced a new $200 billion program to make more money available for consumer loans, such as credit cards, auto loans and student borrowing.

It also announced an additional $600 billion that the Fed would spend buying mortgage-backed securities in an effort to lower mortgage rates and support home purchases and prices.