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The initial estimate by the Bureau of Economic Analysis suggests the world's largest economy is on track for a recession in the second half of the year. A recession is rated as two straight contracting quarters.

A number of indicators fell to lows not seen in decades. Consumer spending shrunk by 3.1 per cent in the quarter, the largest drop since 1980, as a crisis of confidence in US financial institutions has severely curbed the availability of credit to consumers.

Spending on non-durable goods such as food and clothing contracted 6.4 per cent, the most since 1950. Consumer spending makes up about two-thirds of US economic output.

Residential investment plummeted 19.1 per cent on the quarter compared to 13.3 per cent in the second quarter, signalling yet another dive in the US housing market at the centre of the credit crisis.

But US stocks climbed as trading opened in New York because the overall figure was slightly better than expected. Economists had predicted a 0.5-per-cent annualized drop, according to Bloomberg News. The Dow Jones Industrial Average rose more than 2 per cent.

The contraction was reported just five days before the US presidential election between Democratic nominee Barack Obama and Republican John McCain.

Obama has typically benefited from poor economic news that prompts voters to plump for change from the current Republican administration.

"The decline ... is a direct result of the Bush administration's trickle down, Wall Street first, Main Street last policies that John McCain has embraced," Obama said in a statement.

Doug Holtz-Eakin, McCain's chief economic advisor, charged that Obama's plans to raise taxes on the wealthy would "accelerate this dangerous course" in the economy.

The White House acknowledged that growth was likely to remain slow until next year, when either McCain or Obama takes over the presidency.

"We're gonna have a tough few months ahead of us, but we've taken the steps to ensure that the next administration will be off to a good start with a potential for a strong rebound and solid growth early in the administration," Edward Lazear, the White House's chief economic advisor, told television business news channel CNBC.

The US economy grew by an annualized 2.8-per-cent in the second quarter, thanks in large part to strong exports and a 170-billion-dollar fiscal stimulus package approved by Congress in March.

Government spending continued to be the main positive contributor, surging 13.8 per cent in the third quarter.

Exports also remain a boon to the economy compared to other indicators, but slowed sharply to 5.9 per cent, from 12.3 per cent in the second quarter, as fears of a global recession have depressed demand around the world.