Real gross domestic product (GDP) growth for the second quarter has been revised downward from 3.3% to 2.8% — still a respectable pace. Of more importance, key sectors of the economy weakened considerably during the third quarter and the economy is entering the final quarter of the year in troublesome condition, despite recent declines in oil prices.

The housing sector continues to pull the U.S. economy downward. Housing-related weakness is progressively spreading to other sectors, and credit-market constraints are weighing on virtually all components of spending except for outlays by the federal government.

Consumer spending, accounting for about 70% of overall GDP, has been flagging badly as the special stimulus from the personal tax rebates has run out of steam, as job losses have accumulated and as wealth losses in housing and the stock market have weighed on consumer confidence/sentiment and discretionary spending.

Indeed, real disposable income has been declining in recent months and it’s now pretty clear that real personal consumption expenditures contracted in the third quarter — the first quarterly setback since 1991. Plummeting auto sales are an important part of that story.

The confidence of nonfarm nonresidential businesses also has been shaken badly and recent indictors point to a manufacturing sector in recession and systematic declines in commercial construction as well.

It’s now likely that nonresidential fixed investment, in total, will slip into the red zone in the third quarter of the year and that overall GDP growth will be around zero for that quarter — a percentage point below our most recent baseline forecast.

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