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By Lucia Mutikani
WASHINGTON, Feb 10 (Reuters) - U.S. wholesale inventories plunged by a record margin in December and sales dropped, a government report showed on Tuesday, suggesting that the economy contracted even more than initially estimated in the fourth quarter.
A $6.2 billion build-up in inventories had helped to mask the magnitude of the economy's weakness in the fourth quarter.
The Commerce Department said wholesale inventories plummeted by a historic 1.4 percent in December and wholesale sales fell 3.6 percent.
"It turns out inventories were a bigger drain on fourth-quarter GDP than in the last round. For GDP it's looking like the ultimate outlook will be closer to what economists had expected before the advance report," said Mike Englund, chief economist at Action Economics in Boulder, Colorado.
The government last month had reported fourth-quarter GDP fell 3.8 percent, the fastest decline in nearly 27 years. Analysts had forecast a 5.4 percent contraction.
The shift in inventories added 1.3 percentage points to the change in GDP, meaning the economy would otherwise have contracted by at least 5 percent.
The Commerce Department on Tuesday also revised the November figure on wholesale inventories to a decline of 0.9 percent, compared with its previously reported 0.6 percent fall.
Economists polled by Reuters had expected a 0.8 percent drop in December. Compared to the same period a year ago, inventories rose 3.4 percent.
"We still have a huge inventory valuation adjustment. We were assuming that was in place, but it turns out nominal inventories were declining pretty sharply through December," said Englund, adding he expected fourth-quarter GDP to be revised down to 4.6 percent.
The year-long housing-led recession has seen a marked slump in demand as households, experiencing sharp declines in their net worth, slash spending. Companies have responded by cutting payrolls and investments.
The government's wholesale sales figure for November was also revised downward, to a drop of 7.3 percent from an initially reported decline of 7.1 percent.
"This is the latest evidence of the difficult environment for business spending in the fourth quarter. Demand has all but vanished and businesses are scrambling to right-size their inventories," said Tim Quinlan, an economic analyst at Wachovia in Charlotte, North Carolina.
"While wholesalers are trying to pare back inventories, sales have cratered in recent months and are falling at an even faster rate than inventories."
Dropping sales pushed the inventory-to-sales ratio, a measure of how long it would take to sell stocks at the current sales pace, up to 1.27 months' worth -- the largest since March 2002 -- from 1.24 months' in November.
Durable goods sales declined 2.0 percent from a 6.0 percent drop the previous month. Durable goods inventories edged 1.4 percent lower.
Sales of non-durable goods, which account for more than half of wholesales sales, fell 4.9 percent in December. (Editing by Leslie Adler)