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by Robert Gavin
Boston.com

The US economy contracted in the third quarter as the sharpest drop in consumer spending in nearly 30 years erased any remaining doubts that the nation is in a recession, analysts said.

The Commerce Department reported yesterday that the economy shrank at a modest 0.3 percent annual rate in the quarter ended Sept. 30, a better than expected performance that helped send stocks soaring yesterday. The Dow Jones industrial average rose 190 points to close at 9,180.69.

But analysts said strong exports and government spending, particularly on defense, masked increasing troubles in the broader economy. Consumer spending, the biggest and most important component of the economy, plunged at an annual rate of more than 3 percent, the worst decline since 1980. Businesses cut spending on equipment and software for the third consecutive quarter, while residential construction plunged nearly 20 percent.

There are indications of more bad news to come. Exports, which have provided key support to the economy, are expected to decline as a global downturn hurts foreign demand, while the trillions of dollars of value lost in the brutal stock sell-off of the past month will likely result in another sharp decline in consumer spending. The result: accelerating job losses and unemployment that could hit 8 percent, a level not seen since the early 1980s, economists said.

Unemployment was 6.1 percent in September.

“We are on a downward trend,” said Nigel Gault, chief US economist at IHS Global Insight in Lexington. “Everyone can see the signs and realize that the next couple quarters are going to be clear declines for the economy.”

The signs are gloomy in Massachusetts, too. Yesterday, Associated Industries of Massachusetts reported that business confidence in the state fell to its lowest level since the recession of the early 1990s.

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