U.S. Fourth-Quarter GDP Rose 5.9%. Now Comes the Hard Part

The U.S. economy got some hopeful news when the U.S. Commerce Department announced Friday that its revised measure of fourth-quarter GDP showed growth of 5.9%. That makes for two straight quarters of rising GDP growth, as stronger business investment and smaller inventory cuts boosted commercial activity.

A Bloomberg News economists survey had expected the revised report to show an increase 5.7% (which would have matched the Commerce Department's initial report, issued in January), after a 2.2% rise in 2009's third quarter. Prior to this two-quarter increase, the economy had contracted for four consecutive quarters, including a 0.7% decline in second-quarter 2009, a 6.4% plunge in that year's first quarter, and a 5.4% contraction in 2008's fourth quarter. The U.S government revises its quarterly GDP estimate as it receives more information on each quarter that wasn't available earlier.

Further, although other factors can complicate the calculation, two straight quarters of growth has historically been enough for the National Bureau of Economic Research to declare an end to a down-cycle -- in this case, the worst recession for the world's largest economy since the Great Depression.

The Outlook Remains Cautious

Nevertheless, despite the fourth quarter's robust growth, the nation's pronounced recession has taken a toll: U.S. GDP fell 2.4% in 2009 -- the worst calendar-year GDP per performance since 1946. The U.S. has also lost more than 8.4 million jobs during the 2007-09 recession, with ongoing devastating effects.

In current-dollar terms (not adjusted for inflation), U.S. GDP rose 6.3% in the fourth quarter to an annual rate of $14.461 trillion.

Further, economists will likely remain cautious regarding the expansion's outlook. That's because inventory replenishment accounted for most of the fourth-quarter GDP increase -- about two-thirds. Also, business investment rose 6.5%, but consumer spending increased just 1.7%. Government spending fell 1.2%, and real exports leaped 22.4%.

What's Needed Now: Jobs

The key question now Is whether the U.S. economic expansion now self-sustaining. Unfortunately, the answer isn't a clear yes yet, given that most of the fourth quarter's large GDP rise reflects rebuilding of inventories. That activity will wane as supplies get back to normal after being drastically slashed during the recession's depths. From now on, business investment and consumer spending will have to supplant inventory growth to maintain strong GDP expansion.

But economists do agree that sustained U.S. growth can't occur without job growth. The economy can scrape out a few quarters without job growth -- and it typically does after a recession ends because employment gains lag a recovery. However, in the long term, the economy needs organic demand to sustain an expansion.