NEW YORK, Oct 30 (Reuters) - The U.S. economy contracted in the third
quarter as the financial crisis raged, while Japan and Germany said they would
spend billions of dollars to provide a cushion against a deep global recession.
The spending measures would complement a series of interest rates cuts,
including those from China, Norway and the United States on Wednesday.
Japan may cut rates on Friday and the European Central Bank, Britain and
Australia are expected to follow next week, coming on the heels of data that
showed a rapid deterioration in major economies.
"A harsh storm seen only once in 100 years is raging," Japanese Prime
Minister Taro Aso told a news conference.
The president of the San Francisco Federal Reserve Bank, Janet Yellen,
called recent trends in the U.S. economy "deeply worrisome."
The first Fed official to speak after Thursday's news that the U.S.
economy contracted in the third quarter, Yellen said the U.S. federal funds rate
could potentially go "a little lower" than 1 percent, one day after the Fed cut
its benchmark lending rate by a half percentage point. ID:nN30284413
"The mortgage meltdown is far from over, the economy and financial
markets are still reeling from it," she said.
The world's largest economy shrank at a 0.3 percent annual rate in the
third quarter, the sharpest contraction in the United States in seven years.
U.S. consumers slashed spending at the sharpest rate in 28 years in the third
quarter, undermining growth. ID:nN29534671
CREDIT MARKETS THAW
The economy also suffered in the third quarter as businesses cut
investment. More companies announced payroll cuts on Thursday. Credit card
issuer American Express Co said it would chop 7,000 jobs, while cellular phone
maker Motorola Inc said it would lay off 3,000 workers. ID:nN3097788
ID:nN30478862
However, the data on the gross domestic product was not as bad as many
had feared, which along with the global rate cuts and signs of a thaw in credit
markets helped push U.S. stocks .DJI> up about 2 percent.
The gains brought stability to a market that had fallen to 5-1/2-year
lows this month, ravaged by the credit turmoil. U.S. stocks are still down about
15 percent just this month.
European shares .FTEU3> lost much of their earlier gains but still
closed higher.
Japan's benchmark Nikkei average index closed up 10 percent, a third
straight day of gains that have lifted the index 26 percent. However, like most
markets in the world, the Nikkei remains down more than 40 percent this year.
Even as the markets edged higher, there remained some big pockets of
weakness, including insurance, which has been discussed as a possible recipient
for U.S. bailout funds.
Hartford Financial Services Group Inc shares lost more than half their
value, sinking to an all-time low, a day after the company had what its chief
executive described as the worst quarter in its 198-year history, stoking
concern it may need to raise even more capital. ID:nN30172795
"What we see is the world getting much worse," Lazard Ltd Chief Executive
Bruce Wasserstein said in an interview with Fortune Magazine that was open to
the media. "The financial system has a long way to go" before rebounding, the
legendary dealmaker said.
U.S. AUTO BAILOUT URGED
As U.S. banks began announcing the terms under which the government had
injected billions of dollars in capital into them, they reiterated pleas to the
U.S. Treasury Department to clarify whether participating in the $250 billion
program would force them to cut executive pay or bar them from paying dividends.
ID:nN30261535
Still, encouraging news emerged from the banking sector. Closely watched
rates on bank-to-bank borrowing fell on Thursday, helped by the U.S. Federal
Reserve's rate cut on Wednesday and currency swap lines to ease a scramble for
dollars around the world. ID:nLU506449.
Also, the supply of U.S. commercial paper rose on Wednesday, signaling a
Federal Reserve program to buy the securities appears to have revived this
crucial part of the credit market. ID:nN303285
U.S. banks' direct borrowing from the Federal Reserve decreased last week
but remained at very high levels, even as the central bank made loans directly
to businesses for the first time ever. ID:nN30292043
There have been fewer positive signs for the auto industry, and a lobby
group for top U.S. chief executives said the Treasury should use some of the
funds from the bailout legislation to provide direct capital injections to
automakers and their finance companies. ID:nN30284320
But a Bush administration official said the Treasury Department was not
negotiating with General Motors Corp and the owners of Chrysler LLC on a request
to provide direct government aid to their proposed merger.
The U.S. GDP data came five days before the U.S. presidential election
and candidates seized on the report as a chance to take swipes at their rival's
plans.
Democratic nominee Barack Obama called the contracting economy "a direct
result" of Bush administration policies that he said Republican nominee "John
McCain has embraced for the last eight years and plans to continue for the next
four."
The McCain camp fired back that "Barack Obama would accelerate this
dangerous course. ... John McCain offers a new direction and a real choice."
BRAZIL AIMS TO DODGE DOWNTURN
Japan, the world's second biggest economy, unveiled a 5 trillion yen ($51
billion) package of spending measures to support its economy.
"I am certain that what is most important is to remove uncertainties from
the lives of people," said Japan's prime minister. ID:nT214217
Germany planned to introduce a range of steps worth up to about 30
billion euros ($39.17 billion) to boost investment in Europe's biggest economy.
ID:nLU739680
The package will include support for car makers and building renovation
as well as tax breaks enabling companies to write off a share of their
investments, German newspapers reported.
Governments are desperate to put measures in place to protect their
economies against recession, which euro-zone statistics suggested has hit much
of Europe.
Economic sentiment in the 15-nation currency bloc plunged to its lowest
level since 1993 in October, official data showed.
Brazil's top economic officials said the global financial crisis will not
push the country into a recession and that the central bank would unveil a new
lending facility for exporters suffering from a credit crunch. ID:nN30289603
Poor corporate earnings and forecasts for 2009 from companies from
Eastman Kodak Co to British advertising firm WPP Group to Japanese automaker
Mitsubishi Motors Corp supported the view that the downturn would be
long-lasting.
(Reporting by Reuters bureaus worldwide; Editing by Leslie Adler) ($1=96.99
Yen) Keywords: FINANCIAL/
tf.TFN-Europe_newsdesk@thomsonreuters.com
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