Economy Shrank by 3.8% in the Fourth Quarter

The government reported that the economy shrank by 3.8% for the last three months of 2008. That’s the biggest drop in 25 years. The numbers could have been much worse:

“The decline would have been much steeper — more than 5 percent — if shipments of goods had fallen as sharply as orders did.

“The difference between 3.8 and 5.1 percent is the inventory buildup,” Nigel Gault, chief United States economist at IHS Global Insight, said. “My only explanation is that companies could not cut production fast enough.”

“With inventory accumulation gone, the economy will contract in first quarter at more than a 5 percent annual rate, Mr. Gault predicted.”

My view is that the -3.8% number will be revised lower since the government’s report doesn’t include data from December.

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