World and Nation

Economy Shrinks as Spending Drop Underlines Woes

Less than a week before Americans go to the polls to select a president, the government reported Thursday that the economy contracted from July through September. In a stark indication of widening national distress, consumer spending dipped for the first time in 17 years.

Economists said the drop in economic activity — with the gross domestic product shrinking at a 0.3 percent annual rate — presages more bad news in the months ahead. The impacts of a now-global financial crisis are continuing to squeeze companies and impede investment, causing more layoffs and austerity, while prompting Congress to consider a fresh round of spending aimed at stimulating commerce.

“The economy has taken a turn for the worse, big time,” said Allen Sinai, chief global economist for Decision Economics, a consulting and forecasting group. “Consumption literally caved in. It is a prelude to much worse news on the economy over the next couple of quarters. The fundamentals around the consumer are all negative, and there are no signs of any help anytime soon, from anywhere.”

With the economy the dominant issue in the presidential election, the latest batch of dismal data offered no comfort to the Republican nominee, Sen. John McCain of Arizona, who has been running behind the Democratic nominee, Sen. Barack Obama of Illinois, in polls.

On Thursday, Obama seized on the latest evidence of the backsliding economy to warn that McCain would deliver more of the same.

“Our falling GDP is a direct result of eight years of the trickle-down, Wall Street-first, Main Street-last policies that have driven our economy into a ditch,” Obama said while campaigning in Florida. “If you want to know where Senator McCain will drive this economy, just look in the rearview mirror. Because, when it comes to our economic policies, John McCain has stood with President Bush every step of the way.”

McCain’s campaign asserted that Obama’s efforts to increase taxes on wealthy Americans would deepen economic troubles.

“Obama’s ideologically driven plans to redistribute income will impose higher taxes on families, small businesses and investors,” McCain’s chief economic adviser, Douglas J. Holtz-Eakin, said in a statement distributed to reporters.

Economic downturns have proved unkind to the incumbent party in elections. Many analysts argue that the recession of 1990 and 1991 cost President George H.W. Bush a chance at re-election in 1992. President Jimmy Carter, a Democrat, lost his 1980 re-election bid to Ronald Reagan after a particularly nasty recession earlier that year. In 1960, in the midst of a recession, John F. Kennedy, a Democrat, defeated Richard M. Nixon, who had been vice president in the Eisenhower administration.

Not since 1900, when William McKinley, a Republican, won re-election, has the incumbent party retained the White House in the midst of a recession or within a few months after one.

In a statement on Thursday morning, the White House acknowledged the weakening of the economy, while pinning the blame on a series of unusual events and arguing that the $700 billion bailout of the financial system would soon deliver relief.