Economic Surge Caps 2009
Historically, two straight quarters of growth has been enough for the National Bureau of Economic Research to declare the end of a cyclical slump -- in this case, the worst recession for the world's largest economy since the Great Depression.Economists surveyed by Bloomberg News had expected fourth quarter GDP to increase 4.5%, after a 2.2% rise in the third quarter. Prior to this, the economy had contracted for four consecutive quarters, including a 0.7% decline in the second quarter and a 6.4% plunge in the first quarter, as well as a 5.4% contraction in the fourth quarter of 2008.
Nevertheless, despite the most recent 5.7% GDP growth rate, the nation's pronounced recession has taken a toll: U.S. GDP fell 2.4% in 2009 -- the worst calendar year GDP performance since 1946, with more than 7.6 million job lay-offs. Comparing the fourth quarter of 2008 to the fourth quarter of 2009, the economy expanded just 0.1%.
Inventory Stocking Pushes GDP Higher
Despite the impressive GDP growth, economists will likely remain cautious regarding the expansion. That's because most of the recent GDP increase -- about two-thirds, or 3.4% overall -- was propelled by the replenishment of inventories. Meanwhile, consumer spending increased just 2% and business investment rose 2.9%. Government spending dipped 0.2%. Further, as inventories are re-stocked, the U.S. economy will need business investment and consumer spending in the quarters ahead to maintain a strong GDP growth rate.
Also in the fourth quarter, foreign trade grew at the astounding rate of 28.1%. Investment in equipment surged 13.3%, investment in homes increased 5.7%, but investment in structures plunged 15.4%.
In current dollar terms (not adjusted for inflation), U.S. GDP rose 6.4% in the fourth quarter to an annual rate of $14.5 trillion. For all of 2009, GDP totaled $14.3 trillion.
Is the U.S. economic expansion now self-sustaining? Probably not yet, as most of the GDP surge reflects inventory replenishing, and that will wane as inventories are re-stocked, at which time business investment and consumer spending will have to supplant it to maintain a strong GDP growth rate. Most economists say we'll need several more months data on consumer spending to determine the pattern, due to the dynamics of the 'frugal consumer' era -- persistent American belt-tightening that has led to a high U.S. savings rate. That lack of consumer purchasing may jeopardize the recovery because historically consumer spending has accounted for 60-70% of U.S. GDP.
The more optimistic view of the recovery emphasizes modest job growth (1.5 million new jobs in 2010), a second stage of fiscal stimulus (about $200 billion), inventory replenishment by businesses, a sizable increase in annual U.S. auto sales (a 2 million vehicle increase), further stabilization of the housing sector, and a continued uptrend in U.S. exports.
Of those factors, inventory replenish and the replacement of the nation's capital equipment could outperform. Inventories were reduced dramatically during the 2007-2009 recession and a lot of U.S. equipment is aging and needs to be replaced -- two factors that should provide tailwinds to the U.S. economy.
One fact economists agree on: a sustained U.S. economic expansion cannot occur without job growth. U.S. GDP can rise for few quarters without job growth -- and typically does after a recession ends, as employment gains historically lag the recovery. But in the long run, the economy needs an increase in organic demand driven by jobs and rising incomes to sustain the expansion.