Consumer spending, which makes up about 70% of total economic activity, declined 3.1% during the quarter, the first drop in 17 years and the worst since 1980.

The weak results show that a U.S. recession probably began before the mid-September credit freeze. In the coming months, employers are expected to cut payrolls sharply and consumers are likely to pull back spending as credit constraints weigh on borrowing capacity.

A sharp retreat in gasoline prices since the summer should ease pressure on consumers heading into the holiday shopping season. But the effects of the credit crisis may take a deeper toll as consumers are hit by tightening terms for credit cards, auto loans and home mortgages.

Economists forecast a GDP decline of as much as 4% in the final three months of the year. "The outlook for the fourth quarter and beyond is grim, dominated by a tapped-out consumer, ongoing weakness in housing, and an incipient downturn in capital spending that promises to gain momentum," said Joshua Shapiro, chief economist at MFR Inc.