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The US economy shrank at an annual rate of 0.3% in the three months to September as anxious consumers cut their spending at the sharpest rate in almost 30 years.
Data from the Commerce Department in Washington showed that the boost to growth provided by the spring tax rebates proved short-lived during a period when the deepening financial crisis sapped confidence.
Both firms and households pared back their spending in the three months to September and only government spending, stock-building by companies, and the boost to exports from a cheaper dollar spared the economy from a bigger fall in gross domestic product.
The heftiest drop in GDP since the aftermath of the 9/11 terrorist attacks seven years ago underlined yesterday's warning about the state of the economy from the Federal Reserve. The central bank cut interest rates to 1% in response to the sharp deterioration business conditions since the collapse of Lehman Brothers in mid-September.
Consumer spending, which accounts for two-thirds of GDP - fell at an annual rate of 3.1% in the third quarter - the first decline since the economy was in recession in late 1991 and the biggest fall since the spring of 1980.
With households affected by rising unemployment and sharp falls in share prices, personal disposable income fell at an annual rate of 8.7% - a rate not seen since quarterly records began in 1947, prompting a 14% annual decline in spending on cars. Businesses reduced investment in new plant and machinery by 1%.
Tax rebates helped the economy to grow by 2.8% in the second quarter but analysts said the US was now likely to suffer a prolonged period of recession.
James Knightley, economist at ING, said: "The negative growth rate in consumption and investment looks set to continue and we doubt that the inventory and net export boost to growth will last. Indeed, with the dollar having strengthened and external demand weakening we suspect that the net export contribution will turn negative next year. Indeed, we look for four consecutive quarters of negative growth."
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