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The U.S. economy declined in the third quarter, with output of goods and services shrinking at a 0.3 percent annual rate from July to September 2008.

The decline in Gross Domestic Product, or GDP, sets the stage for a U.S. recession, officially defined as two consecutive months of negative economic growth.

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According to the Department of Commerce, the decline in the nation's GDP was the worst since the 2002 downturn, in part fueled by the 9/11 terrorist attacks.

Consumer spending, which makes up more than 70 percent of economic activity, fell 3.1 percent in the third quarter, the first drop in 17 years and the sharpest decline since 1980.

"The U.S. consumer is in major trouble, with wage and salary income growth evaporating, credit extremely tight or unavailable, home prices continuing to decline, household balance sheets stressed, and food and energy costs consuming a large share of budgets," wrote Josh Shapiro, chief economist MFR Inc. in a note to clients, according to the Dow Jones Market Report.

The Federal Reserve Open Market Committee has already acknowledged the market slowdown by voting unanimously to cut its benchmark target interest rate by one half percent to 1 percent, clearly signaling it was considering further cuts.

The Fed cut returns to the 1 percent rate maintained from 2003 to 2004 by former Federal Chairman Alan Greenspan, whom is now largely criticized for causing the development of the subprime real-estate bubble responsible for the current financial services meltdown.

According to Market Watch, Ian Shepherdson, chief economist at High Frequency Economics said the "downbeat" statement from the Fed caused him to pencil in another half-point rate cut for the Fed's next formal meeting on Dec.16.

The Fed's rate cut to 1 percent may have boosted the stock market by showing it was willing to take additional steps to boost credit activity by banks. Still, many economists wondered how low it could go. Perhaps the rates could drop as low as 0.5 percent on Dec. 16, a virtually unheard of level.

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