Fears that the US has moved into recession gathered pace yesterday as figures showed a sharp cutback in consumer spending in the third quarter drove the economy to shrink at an annualised rate of 0.3 per cent, its weakest performance in seven years.

Although the last key piece of economic data before the presidential election narrowly beat expectations, it captured the sharp drop in activity across the country between July and September and the challenges facing the next administration.

The economy grew at a relatively strong annualised rate of 2.8 per cent in the second quarter and economists had predicted a contraction of 0.5 per cent in the third quarter. Analysts believe the economy could contract by more than 2 per cent on an annualised basis in the fourth quarter.

However, there were more signs of a thawing in frozen credit markets yesterday. Issuance of commercial paper expanded for the first time in seven weeks according to data released by the Federal Reserve - a sign that Fed's support for the market has rekindled growth.

The size of this crucial source of short-term funding for companies and financial institutions jumped $100.5bn for the week ending Wednesday. That gain, however, offsets less than a third of the $366bn contraction seen in the preceding six weeks in the wake of Lehman Brothers filing for bankruptcy in September.

Equity markets around the world rallied with varying degrees of enthusiasm yesterday after the Fed cut interest rates to 1 per cent on Wednesday. Asian equities were up sharply.

The dollar remained on the defensive against a basket of currencies. Gold had dropped 2 per cent and oil was trading about $3 lower, near $64 a barrel.
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