In ordinary times, the fall in inventories in the fourth quarter of last year might have been good news for the future of the US economy. It would have signalled that companies, having cleared out excess stock, were free to ramp up production.
But first they would have to be confident that the demand would be there to absorb more supply. With sales and confidence falling sharply amid job cuts and slumping home values, that scenario looks highly unlikely in the next few months. The updated data on last month’s gross domestic product showed that the US faced its worst economic downturn since the second world war.
The commerce department originally estimated that inventories rose by $6.2bn, but now claims that they fell by $19.9bn. The swing shaved 1.1 percentage points off the overall GDP figure.
“Given the steep declines in business and household spending and slipping US exports, firms are still sitting on more inventory than they desire, and additional cuts in production, and employment, are in order,” said Richard Moody, chief economist at Mission Residential.
Economists have darkened their outlooks for the timing of a US economic recovery, as Friday’s revision showing a steeper contraction than previously thought was a reminder that rosy forecasts often wilt. The fourth-quarter results, showing output contracting by an annualised rate of 6.2 per cent instead of 3.8 per cent, capped a grim 2008 when growth sputtered to just 1.1 per cent. Last February the administration of George W. Bush predicted that the economy would grow a healthy 2.7 per cent for the year and on Thursday Barack Obama’s 10-year budget outline projected growth topping 4 per cent from 2011 through 2013.
“They are above the optimistic end of the spectrum,” said Joshua Shapiro, chief US economist at MFR, a research group. “People are holding out hope that the stimulus package will turn things around on a dime but we don’t find that very credible.”
Reams of gloomy economic data have soured hopes of an early recovery. Consumer sentiment, jobless claims and home sales have all posted record lows in recent weeks, signalling that the US economy could contract another 6 per cent in the second quarter before the government’s $787bn stimulus package is felt.
Optimistic economists pro-ject that the economy will contract more slowly in the third quarter before flattening in the fourth. During the last month, new jobless claims reached a 27-year high, causing fears that the February unemployment rate could reach 8 per cent. In January companies cut back on orders for durable goods by 5.2 per cent, highlighting a further collapse in capital spending. The Conference Board’s February index of consumer confidence fell to the lowest level since its inception in 1967, a sign that spending will continue to be tight.
“We’re clearly digging out of a bigger hole,” said Brian Bethune, an economist at IHS Global Insight.
The six months up to the end of the first quarter could be the worst such period since the second world war and more severe than the same span during the 1982 recession, argue economists at Goldman Sachs. Only three times since the Great Depression has the US economy contracted more than 6.2 per cent. Bigger declines were recorded in 1957, 1980 and 1982, when it shrank 6.4 per cent. Goldman Sachs economists predict the economy will contract 4.5 per cent in the first quarter of 2009 but said on Friday that there was “substantial downside risk” to that forecast. Economists at Citigroup said although they still expected the current period to be the most intense spell of economic contraction, weakening employment and financial expectations could make the downturn deeper.
“We are looking at what is almost certain to be the longest, and quite likely to be the deepest, recession of the postwar era,” wrote John Ryding and Conrad DeQuadros, economists at RDQ Economics, in a note to clients.
Such prognoses clash with White House estimates that after a contraction of 1.2 per cent in 2009, US output will bounce back to 3.2 per cent growth next year.
Projections from the Congressional Budget Office are less hopeful, forecasting a contraction of 2.2 per cent this year and 1.5 per cent growth in 2010.
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