The U.S. economy contracted in the third quarter, posting its biggest drop in seven years.

The U.S. Commerce Department said today the economy shrank at an annualized rate of 0.3% in the July-September period, in its first estimate of third-quarter GDP.

It was the sharpest contraction for the U.S. economy since a 1.4% annualized drop in the same quarter of 2001 during a recession.

The drop, however was not quite as big as economists had been projecting; they had been looking for an annualized contraction of 0.5%.

“The report was slightly better than expected, but was nonetheless weak,” commented TD Securities economics strategist Millan Mulraine. “It is now clear that U.S. economic activity has ground to a halt.”

Consumer spending fell by its biggest amount in 28 years, tumbling at an annualized pace of 3.1%. That was the worst reading on consumer spending since 1980, when the U.S. was in another recession.

Consumer spending accounts for roughly 70% of U.S. GDP.

The negative quarterly growth could signal the onset of recession in the U.S. A recession is classically defined as two consecutive quarters of economic contraction.

The economy appears likely to contract even more in the fourth quarter, according to Dawn Desjardins, assistant chief economist at RBC Economics Research.

“Until there is evidence that financial institutions are willing and able to make loans to businesses and households, downside risks to the economy will remain,” she commented.

Meanwhile, the number of U.S. workers filing new claims for state unemployment benefits was unchanged last week but remained near the half million mark and above the average for the 2001 recession.

Initial claims for jobless benefits held steady at a seasonally adjusted 479,000 in the week ended Oct. 25, the U.S. Labor Department said in a weekly report today. Economists had expected claims to drop by 3,000.

IE