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TwitterReleasing the first in a series of three reports on the fourth quarter performance of 2009, the Commerce Department today triggered a mixed bag of sentiments, generally positive, to its numbers. It has reported that, in the fourth quarter, the US economy grew by 5.7% annual pace, the fastest in six years. These came in as a pleasant surprise to analysts who expected an average annual growth of 4.7% annual pace. These results perhaps built on the Q3 results, which reported 2.2% annual growth rate. However, they could not negate the discouraging declines in the first (6.7%) and second quarter (0.7%), so that overall, for 2009, the economy shrank at a depressing 2.4% rate, the worst annual performance since 1946.
The good news is that this expansion is said to have little correlation with the federal spending and has been attributed to the increase in consumer activity, and exports sector. The results are indicative of the creation of new demand for goods and services especially in the technology sector. The equipment and software sector itself posted a growth of 13% in the first quarter of last year.
Consumption accounts for 70% of the U.S economic activity, and contributed 1.44 percentage points to the GDP, which indicates, rather lucidly that the consumer, is finally here.
Another positive aspect is that the private domestic final demand – which comprises personal consumption expenditures, business fixed investment and housing also grew at an annual rate of 2.2 percent in the final three months of last year, consistent with the previous three months.
The NYSE should show sign of revival after the Q4 report.
“We expect a similar growth pace in the current quarter in the first three months of 2010,” Alan Levenson, the chief economist for T. Rowe Price Associates, said in a note to investors.
The red flag, however, is the revelation that the restocking of inventories of American businesses largely drove this expansion. This factor contributed a monstrous 3.4% compared with just 0.7% in the third quarter when growth was a far calmer 2.2%. Excluding the inventory factor, real final sales of domestic product were up just 2.2% in the October-December period, after rising 1.5% from July to September.
Analysts claim that it is premature to start celebrating just yet. It is unlikely that the inventories will provide a similar boost to the growth in future quarters, since they are now not cutting back either in the inventory or the shelves. More than that, the unemployment rate remains a stubborn 10% with states such as California, Rhode Island, Michigan recording even higher unemployment rates. Financially insecure people, cannot and will not contribute much to increase in consumer spending, which analysts claim the only roadmap to pulling out of the recession. Obama this week said job creation will be the “number one focus in 2010.” Speaking during his first State of the Union address, Obama called on Congress to deliver a new jobs bill to his desk.
Also, investment in nonresidential structures continues to decline even in the wake of the stimulus package passed last February, and many economists fear that this growth is essentially a temporal phenomena. Economic recovery they claim, is still fragile, especially given that anticipated increase in various taxes this year. Prices of goods and services purchased by U.S. residents also rose 2.1 percent in the fourth quarter. Perhaps echoing the same sentiment, Wall Street, after starting the day with solid gains, also pulled back by noon. Whether this is the harbinger of solid future growth and good times, or the just another transitory economic spike, is premature to conclude. Like they say, Time will tell.
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