GDP Rose 5.6% in Fourth Quarter on Strong Corporate Profits

U.S. GDP increased 5.6% in Fourth Quarter On Strong Corporate Profits
U.S. GDP increased 5.6% in Fourth Quarter On Strong Corporate Profits

More upbeat news for the U.S. economy: The nation's gross domestic product grew 5.6% in the fourth quarter of 2009, the Commerce Department announced Friday in its final revision of that period's numbers. The data shows that strong corporate profits and exports overcame tepid consumer spending to give the country its second straight quarter of GDP growth.

Still, those gains were slightly under the consensus estimate of economists surveyed by Bloomberg News, who had expected fourth quarter GDP (final) to increase 5.9%, after a 2.2% rise in the third quarter.

Prior to the most recent two quarters, the economy had contracted for four consecutive quarters, including a 0.7% decline in the second quarter of 2009, a 6.4% plunge in the first, and a 5.4% contraction in the fourth quarter of 2008. The U.S government revises its GDP estimate as it receives more information on a respective quarter not available earlier.

In current dollar terms (not adjusted for inflation), U.S. GDP rose 6.1% in the fourth quarter or by $211.7 billion to an annual rate of $14.45 trillion. For all of 2009, GDP totaled $14.26 trillion, down 1.3% from 2008.

Nevertheless, despite the 5.6% Q4 GDP growth rate, the toll of the recession continues to be felt: The most severe contraction since the end of World War II has resulted in more than 8.5 million jobs lost.

Exports, Profits Jump

In the fourth quarter of 2009, exports surged 22.8%, business profits (before taxes) jumped 8% and are up 30.6% on a year-over-year basis, non-residential construction surged 18%, while consumer spending rose just 1.6%.

Also, the GDP gains of the last two quarters do not technically mean the recession is over. The economy is recovering, but the National Bureau of Economic Research is the widely-accepted determiner of the economic cycle, and the NBER has not yet declared an end to the recession.

Is the U.S. economic expansion now self-sustaining? Not yet: Business investment and consumer spending in the quarters ahead will have to supplement inventory replenishing (which will wane as inventories are re-stocked) in order to maintain an adequate GDP growth rate. Further, most economists say they'll need several more months of data before they can accurately gauge the effects of consumer spending in this new "frugal consumer" era. American belt-tightening has led to a high U.S. savings rate, which is a good thing for the long term, but that lack of consumer purchasing may jeopardize the recovery because historically, consumer spending has accounted for more than two-thirds of U.S. GDP.

One fact economists agree on is that a sustained U.S. economic expansion can not occur without job growth. U.S. GDP can rise for a few quarters without employment gains -- and typically does after a recession ends, as job growth lags the recovery. But in the long term, the economy needs an increase in organic demand -- household formation driven by job growth -- to sustain the expansion.