US ECONOMY : Going South

US GDP fell at an annual rate of 3.8% in the fourth quarter, below the decline of 5% or more that many economists had anticipated.

However, there is precious little reason for optimism. Almost all the unexpected growth came from a small rise in business inventories. This is almost certainly because firms did not reduce production quickly enough to keep pace with slumping orders. To get inventories back in line, more production cuts in the current quarter are likely. Morgan Stanley had expected GDP to fall by 4.5% in the current quarter, but now thinks it will fall by 5.5%.

While US purchasing managers have slashed their stocks, the ISM customer inventories index jumped to 57 in December,the second-highest reading ever.  So even if demand stabilizes quickly, which is in doubt, more production cuts lie ahead…

Inventories have become very resilient in this recession… FOR NOW.