WASHINGTON — The U.S. economy grew by a better-than-expected 5.7 percent annual rate during the final quarter of 2009, the Commerce Department reported Friday. However, economists think that pace is unlikely to continue.
The surprisingly strong number followed a 2.2 percent annualized growth rate in the third quarter of 2009. The combined half-year record strongly suggests that the deep U.S. recession is over, though the economy remains hobbled.
"The worst is now officially behind," read the headline of a research report Friday by Bank of America Merrill Lynch Global Research.
However, the time for celebration isn't yet here.
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"The (growth) number was very positive and is proof positive that the Great Recession is over. However, it is inappropriate to conclude that the coast is clear," said Mark Zandi, the chief economist for forecaster Moody's Economy.com. "Real demand grew only close to 2 percent, which isn't enough to convince businesses to start hiring again."
The solid fourth-quarter growth was fueled by businesses beginning to replace the supplies they'd burned through without replacing last year. Having restocked the shelves, businesses won't need to purchase as much in subsequent quarters until overall demand increases more than it has so far.
"We don’t expect that to continue" into this year, said Martin Regalia, the chief economist of the U.S. Chamber of Commerce. He said the recent growth was a one-off phenomenon that didn't change his forecast for 3 percent growth in 2010. "This number didn’t change our forecast at all, not one iota."
David Huether, the chief economist for the National Association of Manufacturers, agreed.
"Restocking of business inventories provided a major, though temporary, boost to growth in the fourth quarter, accounting for 59 percent of the increase in (growth) in the final three months of the year," he wrote.
Still, the fourth-quarter growth improved a horrid 2009 annual number. For the year overall, the U.S. economy contracted by 2.4 percent. That was the worst full-year performance since 1946. Last year's contraction also was on top of another year of virtually no growth, 0.4 percent, in 2008.
What economists call the Great Recession began in December 2007, a year that posted a sluggish annual growth rate of 2.1 percent. Americans have been trapped in a protracted downhill slide that many economists predict won't end until 2011. The unemployment rate remains at 10 percent, and hiring is still sluggish at best.
The sum of economic activity stood at around $14.5 trillion in the fourth quarter of 2009, about where it was in the second quarter of 2008. That suggests almost two straight years of a flat economy.
President Barack Obama cautiously highlighted the positive trend, taking care not to declare victory. Speaking to a retreat in Baltimore of Republican members of the House of Representatives, he noted that the economy had contracted by 6.4 percent in the first three months of last year.
"You've seen a 12 percent reversal in the course of (last) year. This turnaround is the biggest in three decades, and it didn’t happen by accident," said the president, suggesting that his economic program has helped.
With unemployment remaining high, however, Obama also highlighted a new $33 billion plan to offer $5,000 tax credits to firms, mostly smaller ones, that add workers. The government also would provide tax credits to employers that raise wages for employees who earn less than $106,000 annually.
The U.S. Chamber of Commerce gave only tepid support for the plan.
“It will give the companies that were going to hire people anyway a little more cash flow. It isn’t really going to stimulate jobs,” Regalia said.
Friday's report on the gross domestic product, the broadest measure of trade in goods and services, was nonetheless a positive surprise. Most mainstream economists had expected a fourth-quarter growth rate of 4.5 percent to 5 percent.
“Today’s GDP report is the most positive news to date on the economy,” Christina Romer, the head of the White House Council of Economic Advisers, said in a statement.
Final sales exceeded expectations, meaning that the growth was fueled by more than just the expected replenishment of inventory.
Friday’s preliminary numbers, which are subject to two later revisions, instead reflected new demand for goods and services. That was evident in equipment and software, which posted sales above 13 percent in the final quarter.
Another positive surprise was the contribution from exports.
"Exports, which are mainly manufactured products, increased at an annual rate of 28 percent in the fourth quarter. This export rise was both the fastest and largest contribution to GDP growth in 30 years," Huether said.
Consumption, which accounts for 70 percent of U.S. economic activity, contributed 1.44 percentage points of GDP in the fourth quarter, an indication that battered consumers may be cautiously emerging from their shells.
"The recovery from the Great Recession firmed in the fourth quarter as real GDP increased at its fastest rate since the third quarter of 2003,” New York forecaster RDQ Economics said in a research note. “However, also as expected, a sharp slowing in inventory liquidation accounted for 3.4 percentage points (or 60 percent) of the 5.7 percent increase in real GDP.”
Translation: When companies aren’t slashing their excess supplies, they’re burning through them in sales and restocking them, creating demand for goods and services.
The economy must grow at an annual rate of 3 percent or more to reduce the unemployment rate, which is expected to rise in coming months even as employers begin hiring, because millions of out-of-work Americans will resume looking for jobs.
For the 15.3 million unemployed, the strong fourth-quarter growth may seem a phantom. Romer acknowledged as much.
"While positive GDP growth is a necessary first step for job growth, our focus must remain on getting Americans back to work,” she said. “That GDP rose strongly in the fourth quarter of last year while employment fell and the workweek increased only slightly emphasizes the need for policy actions designed to help spur private-sector job creation.”
PERFORMANCE OF GDP COMPONENTS
- Real personal consumption, increased 2 percent.
ON THE WEB Commerce Report
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