Economy Grows At 5.7% Rate During 4th Quarter

Stronger than expected (economists are forever being surprised, aren't they?) and it the second straight quarter of growth signals the technical end of the recession.

Gross domestic product, the broadest measure of economic activity, rose at a 5.7 percent annual rate in the fourth quarter, the Commerce Department said Friday. That is the highest pace of growth since 2003, and it constitutes strong proof that the recession reached its end earlier in 2009. It was also a surprisingly positive result, well above the 4.6 percent rate of GDP growth forecasters had expected.

But there remained reason to doubt how strong the economic recovery will be in 2010. The biggest component of the GDP growth was a steep drop in the pace at which businesses were cutting back on their inventories. Firms reduced their inventories by $33.5 billion in the fourth quarter, compared with $139 billion in the third. In the math of GDP, which attempts to capture the value of goods and services produced within U.S. borders, that added 3.4 percentage points to overall growth.

The down side is that inventories are unlikely to provide a similar boost to growth in future quarters. Now that companies are not cutting back on the goods on their warehouses and store shelves in large numbers, the way they were during the depths of the recession, inventories will not add much to growth in the coming quarters unless businesses decide they cut back too far during the downturn and decide to actively rebuild their inventories.

There was also a significant boost to growth from businesses investing again in equipment and software. They cut back dramatically on capital spending during the depths of the recession, and now such spending seems to be clawing back, rising at a 13.3 percent annual rate in the fourth quarter. That contributed 0.8 percentage points to overall growth.

First, this is good news. Tempting though it may be to down play it, it was annoying when the left did it for 8 years and I'd hate to be in the position of rooting against the country's well being.

That said, even the Washington Post is including caveats that the engine of this growth, the rebuilding of inventories, isn't likely to repeat itself. We may be looking at the front end of the double dip recession we've heard so much about.

As always, jobs is a lagging indicator and the next report on that is due out in a week.

The White House is obviously going to trumpet this number (though it is subject to revision) and they'll enjoy their day*. Still they have to walk a fine line between declaring "Mission Accomplished" (if you will) and the fact that a lot of people are still out of work and in tough shape.

The WSJ has a round up of economists reacting to the report.

From the less than excited end of the spectrum.

# GDP growth broke to a level above expectations based primarily on stronger than anticipated inventory… While consumer spending, the housing markets, and export growth all played a role, the 3.4% contribution to headline growth from inventory expansions remains easily the biggest factor in today’s GDP release… Also note that much of the inventory improvement was limited to non-durable goods and the auto industry, the latter of which is building inventories with questionable short term sales prospects. This inventory-driven GDP number also calls into question the sustainability of this type of growth–there’s no reason to anticipate that inventories will continue to build aggressively with consumer spending remaining somewhat stagnant. –Guy LeBas, Janney Montgomery Scott

On the more optimistic side...

The 13.3% rise in equipment investment was the best since the first quarter of 2006. Equipment investment contributed 0.8 percentage point to GDP growth in the fourth quarter (0.5 point more than we had anticipated). The other big upside surprise was in foreign trade. This reflected a much smaller advance in imports than we had expected. The combination of stronger investment and weaker imports suggests that more of the upside in investment was fueled by domestically produced goods than we had assumed. –David Greenlaw, Morgan Stanley

*The White House blog is already on the case.

posted by DrewM. at 09:44 AM

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