Consumers cut back on their spending by the largest amount in 28 years - and that was mostly before the financial markets fell apart. That helps explain a 0.3 annualized drop in the gross domestic product for the July-September quarter. The decline compares with a 2.8 percent gain in the second quarter, when we were spending those stimulus checks. The third quarter contraction wasn't quite as bad as what the experts had been expecting, which may explain why stocks are up this morning. From Economix:

The last quarter in which consumers reduced their spending came in 1991. Since then, neither the recession of 2001 nor the slow income growth of the past seven years has kept households from increasing their consumption. They often relied on debt — in the form of home-equity loans, mortgage refinancings and credit-card loans — to continue spending. But the housing bust, the resulting credit crunch and the deteriorating job market have forced many people to cut back. Personal consumption fell at an annual rate of 3.1 percent in the third quarter of this year, its biggest drop since 1980, when the economy was in a deep recession.

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Many economists expect consumer spending to continue falling in 2009 — although probably not at such a steep rate — and the current downturn to continue for months. Employers are now cutting jobs, and the pay of most workers is lagging well behind inflation. “All in all, we look for a recession that is both longer and deeper than those in recent memory, lasting at least through 2009,” said Joshua Shapiro of MFR, a research firm in New York. Ian Shepherdson of High Frequency Economics predicted that the economy would shrink at an annual rate of about 1 percent in each of the next two quarters.