An unexpected rise in inventories led to a much smaller-than-expected 3.8% annualized decline of U.S. GDP last quarter. The quarter, along with 3Q74 when GDP also fell 3.8% saar, ranks only as the tenth worst one since mid-1947. The rise of inventories was unplanned and points to weaker growth in the first half of this year than would otherwise be the case. Excluding the buildup of inventories, GDP would have dropped 5.1% saar in 4Q08. For all the doom and gloom talk, nevertheless, 2008 as a whole could have been a lot worse. Despite the classification of recession for the entire year and declining jobs in every month of 2008, GDP advanced 1.3%, seven-tenths more slowly than in 2007, and only residential investment fell among components of final demand. Net exports enhanced growth by 1.4 percentage points last year, reflecting strong competitiveness from previous dollar depreciation. It is widely said that other economies have contracted more sharply than the United States because the Fed was more aggressive in cutting interest rates early and sharply. That stance translated into dollar depreciation, and that mechanism accounted for the different severities of recession more than disparate drops in interest rates per se. Once the financial crisis kicked into high gear, risk aversion trumped economic fundamentals, and the dollar turned upward. This reversal could impede recovery in the United States relative to recovery elsewhere, contradicting the conventional wisdom now that onset of a U.S. recovery will happen sooner than in other economies and be comparatively stronger.

In contrast to the U.S. data, Canadian monthly GDP in November was weaker than assumed, dropping 0.7%. This was the fourth straight month without positive growth, and fourth-quarter GDP is apt to decline more than the 2.3% assumed by the Bank of Canada even if December is only half as bad a month as November was. Industrial production dropped 1.5% in the latest reported month and by about 10% at an annualized rate between July and November. 18 of 21 manufacturing groups fell in November, utility production declined by 1.1%, and construction recorded a fourth consecutive drop. Service-sector output, retail sales and wholesale turnover each fell for the third time in four months. In the year to November, overall GDP declined 0.8%, with goods falling 3.8% and services advancing only 0.7%. Canada's central bank is forecasting negative growth 4.8% saar in 1Q09 and 1.0% next quarter but sees positive growth resuming in the second half of this year.