Like a holiday party-goer who has celebrated too much, U.S. manufacturing is entering the new year with a bit of a hangover.

        The rapid cooldown in the economy has caught many manufacturers with too much inventory, say experts. That in turn threatens to slow the economy even more in the new year.

        “The last few years consumer spending has been unusually strong and as a result a lot of firms have tended to overproduce,” said Gordon Richards, economist for the Washington, D.C-based National Association of Manu facturers.

        “The auto industry is an excellent example. Last year, they couldn't produce enough cars. Now, for this year's models they've got the opposite problem. Everybody bought a car last year. Now they can't move cars off dealers' lots.”

        Auto sales through November were down more than 1 million units from the same period the previous year. Auto inventories were at an 80-day supply in mid-December, when 60 days' supply is considered ideal.

        Bruce Cayes, managing director of Edwin H. Colby Associates, a Fort Mitchellmanufacturing consulting firm, says the strong econo my during the last decade has obscured inefficiency and excessive costs at a lot of companies that will be squeezed when the economy slows.

        “I think there is less inventory in the supply chain than there was 10 or 15 years ago,” he said. “But the reality is people are making money because times have been so good in spite of themselves.”

        U.S. manufacturing declined in November to the lowest level in two years as orders shrank for a fifth month in row, according to the National Association of Purchasing Managers. The group's closely watched factory index fell to 47.7 last month, the lowest since December 1998. A reading below 50 signals a contraction.

        “What you've really got is a problem of markets becoming somewhat saturated,” Mr. Richards said.

        “And the other thing hurting manufacturing now is the fact that the dollar has been so high. That means there's more competition from imports and also that (U.S. manufacturers) can't export as much.”

        Mr. Richards says sees a small risk of recession but a greater possibility of a two-tier economy — where the overall growth rate continues at 2 or 3 percent while pockets of the economy are hit with a slowdown.

Are we headed for a recession?
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  • Interest rates: Housing market may stay strong
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