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U.S. GDP grows at 5.7% rate in fourth quarter

The rate is the best in six years, but economists don't expect it to last.

January 30, 2010|By Don Lee
  • "It's a stark improvement over the rapid and terrible decline that we were experiencing one year ago," President Obama said of the GDP report. Above, Oscar Salgado rings up items at a Home Depot store in Burbank.
"It's a stark improvement over the rapid and terrible decline… (David McNew / Getty Images )

Reporting from Washington — The U.S. economy grew in the fourth quarter of 2009 at the fastest pace in six years, but many economists and business owners remained unconvinced that a full-scale recovery was underway or that substantial job growth would soon follow.

The nation's total production of goods and services expanded at a heady 5.7% annual rate in the final three months of last year, the Commerce Department said Friday in its first estimate of the quarter's gross domestic product.

That's more than double the 2.2% growth rate in the third quarter and a dramatic turnaround from the first three months of last year, when the economy was mired in deep recession and the GDP shrank at a 6.4% annual rate.

Even so, economists believe that most of the fourth-quarter growth was driven by temporary factors -- cyclical inventory changes and government stimulus -- that are likely to fade in the middle of this year.

And it remains to be seen whether private investments, exports and particularly consumer spending, which alone accounts for about 70% of U.S. economic activity, can pick up enough of the slack to sustain a solid recovery.

"I personally think it's somewhat of a blip," said Darlene Miller, president of Permac Industries Inc., a precision-machined goods maker in the Minneapolis suburb of Burnsville.

Miller's 35-employee firm manages the inventories of companies in various industries. She said the strong fourth-quarter GDP was in line with what she saw: Her customers, who had slashed their stock of goods drastically during the recession, were starting to produce more and return to normal inventory levels.

"But what I'm hearing is we're going to continue to see this in the first quarter, maybe the first half, and then go back down again," she said. "As much as entrepreneurs would love to believe we are on an upswing, I don't think anybody is convinced we've reached that stage."

Kathy Bostjancic, a senior economic advisor at the Conference Board in New York, agreed.

"It's a nice improvement compared to the depths of the recession," she said of the Commerce report. "But still, these [data] are not indicating that businesses are at a point where they are going to let up on the spending reins and do a lot of meaningful hires.

"The key question for the U.S. economy is the consumer," she said, adding that people's spending power is weighed down by big debts, tight credit and, most significantly, employment worries. "It will come down to jobs and income."

Some economists were more optimistic about the outlook, saying that economic growth, though almost certain to slow down from the sizzling fourth-quarter rate, would continue to benefit from expansive fiscal and monetary policies for most of this year.

Federal Reserve policymakers said this week that they would keep their benchmark interest rates near zero for "an extended period."

"The recovery does appear to have staying power in 2010, and it could very well be stronger than the slow pace initially anticipated," said Lynn Reaser, president of the National Assn. for Business Economics.

President Obama, acutely aware of the mood of the nation as it continues to struggle with double-digit unemployment, pledged in his State of the Union Address this week to make the economy and jobs his top priority.

And on Friday, in a new proposal to jump-start the sluggish job market, he formally announced a $33-billion plan that would give a $5,000 tax credit to businesses for every new employee they add this year.

In a speech in Baltimore on the proposed tax-credit program, which is aimed at small businesses, Obama cited the latest GDP report as evidence of the progress made over the last year but was careful not to overstate its significance.

"It's a stark improvement over the rapid and terrible decline that we were experiencing one year ago," he said.

Analysts said that in order to generate the hundreds of thousands of new jobs a month necessary to drive down the unemployment rate, economic growth would need to run at a rate of at least 3% for some quarters. Many economists are forecasting growth of about 3% or less for this year.

Barring major new government stimulus money, it's not clear whether there's enough fuel to exceed that level.

Ben Herzon, a senior economist at Macroeconomic Advisers, a St. Louis forecasting firm, is more bullish than most. He sees GDP growth averaging nearly 4% this year. Herzon pointed to some encouraging signs in the Commerce report.

Personal spending, after increasing at a 2.8% rate in the third quarter, edged up at a 2% rate in the fourth -- hardly robust but better than expected. Purchases of cars, after all, fell at a 20% annual rate in the final three months after many people bought vehicles in prior months using the "cash for clunkers" trade-in incentive.

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