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Belt-tightening by American consumers on a scale unprecedented for almost three decades meant the world's biggest economy joined the list of countries in or close to recession, according to official figures released yesterday.
The Commerce Department in Washington said both households and businesses were spending less in the three months ending in September.
Only military spending by the Pentagon, the boost to exports from the cheaper dollar and stock building by companies spared the US from a more severe contraction in the third quarter.
Consumer spending fell at an annual rate of 3.1% between July and September in response to the biggest squeeze on personal disposable incomes since the government began collecting quarterly data in 1947.
The Commerce Department said it was the sharpest cut in consumer spending since 1980, with an annualised drop of more than 14% in durable goods such as cars and furniture. Governors of six states urged the US Treasury and the Federal Reserve to take "immediate action" to prevent a deepening crisis for the car industry that would become "an unmanageable disaster" for state governments.
America's central bank cited the weakness of consumer demand when it cut interest rates to 1% on Wednesday. Analysts said the US was likely to fulfil the technical definition of recession - two consecutive quarters of falling GDP - in the final three months of 2008 and would continue to contract in 2009.
Paul Ashworth, US analyst for Capital Economics, said the fall in output in the third quarter had been "the tip of the iceberg", adding that he expected the economy to contract by 1.5% in 2009 and remain flat in 2010. "Such a cumulative decline in output would make this one of the worst downturns since the Great Depression," he said.
The European commission's monthly survey of consumers and businesses in the Eurozone found economic sentiment at its weakest since the recession of the early 1990s. Analysts said the decline in the index from 87.5 to 80.4 during October was consistent with GDP falling by about 1% in 2009 and expressed confidence that the European Central Bank would join the Bank of England in cutting interest rates next Thursday.
The Japanese government yesterday unveiled a 27tn yen (£170bn) stimulus package to help small businesses and provide emergency cash to families and is today expected to cut interest rates for the first time in seven years.
Two months ago parliament passed an ¥11.7tn stimulus package to counter rising food and energy prices. That Japan should be raiding its war chest for the second time since August was seen as a clear indication that after months of skirting the worst effects of the financial crisis, the world's second-biggest economy is heading for trouble.
"The global financial crisis is almost certain to affect Japan's real economy," the prime minister, Taro Aso, said in a televised news conference. "We understand that the most important thing is to assure the security of average households."
He said the world was in the midst of a "financial storm that comes along once every 100 years". The stimulus, equivalent to about 1.2% of Japan's annual GDP, will include ¥2tn in benefits for households, or about ¥60,000 for every family of four, as well as expanded loans for small businesses and tax relief on mortgages.
Financial markets responded positively to the prospect of action from policy makers. The FTSE 100 was up almost 50 points, while the Dow Jones was up 150 points in early afternoon trading.
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