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US economy shrinks at fastest pace in seven years

(Agencies)
Updated: 2008-11-26 09:33

Credit Crisis to Blame 

The White House blamed the contraction in the economy on the credit crisis that has emanated from the collapse of the US housing market.

Heather L. Noble stands in front of her home in Garden City, Mich., Wednesday, Nov. 12, 2008. According to Census data, almost 12 million American homeowners with a mortgage are spending 38 percent or more of their income on housing expenses, the new benchmark for an unaffordable mortgage. [Agencies]

"There's no question the financial crisis was a major shock to the economy, and that's being reflected in the economic data. We believe a big reason for this was the freezing in credit markets this fall," said White House spokesman Tony Fratto.

"That's why we've been so focused on unfreezing our credit markets and stabilizing our financial system."

The housing malaise has infected other sectors of the broader economy, translating into the highest unemployment rate in 14 years and a record drop in retail sales. Steps by global authorities, including the Federal Reserve's interest rate cuts, have had limited impact in freeing up credit and stimulating demand.

Analysts reckon the US central bank could trim the overnight federal funds by another half point at its next meeting in December after an aggressive easing campaign that has already pushed it down to 1.0 percent from 5.25 percent over the past 14 months.

"Today's numbers tell us that the economy is probably in a long and deep recession, probably half way through that. We still have a lot of water under the bridge," said Cary Leahey, senior managing director at Decision Economics in New York.

"We see the Fed cutting another (half point) in December and following up with another quarter of a percent immediately after ... maybe down to almost zero then," he said. After that, the Fed will turn to an unconventional policy of flooding the banking system with excess cash, Leahey said.

An uptick in the Conference Board's consumer confidence index to 44.9 from in November from 38.8 in October did little to brighten the mood.

"The confidence index is still at the lowest level on record since 1975 and is clearly below its worst levels in each of the past four recessions," said Yelena Shulyatyeva, an economist at BNP Paribas in New York.

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