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Fourth-quarter GDP growth boosts hopes for recovery

US economic growth during the fourth quarter beat market expectations at 5.7 percent Friday, but leaves a GDP contraction of 2.4 percent for 2009. Sal Guatieri, economist at BMO Capital Markets said the data, "suggests the recovery is gaining legs".

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AFP - The US economy roared to life in the fourth quarter with a 5.7 percent growth rate, as brisk business spending to replenish inventories offset sluggish consumer activity, government data showed Friday.

The Commerce Department figures showed growth accelerated from the 2.2 percent pace in the third quarter, when the economy expanded for the first time after four quarters of contraction and the worst recession in decades.

Even with the rebound, gross domestic product contracted by 2.4 percent for the full year 2009, the worst performance since 1946, due to the collapse in economic activity in the early part of the year.

Still, the robust growth in the October-December quarter was the best since 2003 and significantly better than the 4.7 percent annual pace expected by analysts.

"This suggests pretty good momentum heading into the first quarter," said Sal Guatieri, economist at BMO Capital Markets. "It suggests the recovery is gaining legs."

The big gains came in large part from businesses ramping up production to rebuild inventories, which economists say may skew the picture of overall activity but is a normal part of recovery. Inventories accounted for 3.39 percentage points of GDP.

Stripping out inventory adjustment, real final sales -- a reflection of the underlying pace of growth -- was at a 2.2 percent rate, the report showed.

GDP, or the output of all goods and services in the economy, was an annualized 14.46 trillion dollars based on the fourth-quarter data.

"GDP is certainly not as strong as it looks," said Scott Brown, chief economist at Raymond James & Associates.

"Underlying domestic demand was pretty soft, positive but moderate... We're not seeing a sharp V-shaped recovery."

Augustine Faucher at Moody's Economy.com said the report offered a mixed picture.

"With so much of the expansion coming from inventories, it remains to be seen if the economy can maintain strong growth in the quarters ahead, and the labor market remains a worry," he said.

"Growth will weaken in the first half of 2010, before accelerating in the second half of this year and into next."

Other factors helping fourth-quarter GDP included auto production, which accounted for 0.61 percentage points of the total. A slowing pace of imports also boosted the growth rate.

Consumer spending, which is traditionally the key driver of economic activity, rose at a 2.0 percent pace, down from 2.8 percent in the third quarter, and accounted for 1.44 percentage points of GDP.

But Guatieri said consumer spending remained on a positive track, pointing out that the third-quarter figure was boosted by the "cash for clunkers" incentives for automobiles that prompted a surge in car buying.

Economists say the key to a more sustainable pace of growth will be a rebound in consumer spending, which accounts for around two thirds of economic activity.

Many have argued that the underlying pace of expansion may be too weak to help bring down unemployment, currently at 10 percent.

And because high unemployment often leads to consumer caution, spending could be weak, further imperiling a recovery.

The government is set to report data next Friday on unemployment and job creation in January.
 

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