US GDP Q4 2009: A Case Study

U.S. GDP rose 5.7% in the fourth quarter which was the fastest pace of growth in six years, surpassing estimates of 4.7%. The second consecutive quarter of growth signals that the economy has distanced itself from the worst recession since WWII (Good Job Obama!!).

BUT FOR ALL 2009, the year saw a shrinkage of 2.4% for the US economy -worst single-performance since 1946

A 39.3% increase in gross private investment was the primary driver of growth, as companies increased their spending on equipment and software.

However, a -15.4% decline in structures -which is the sixth straight negative reading- is evidence that companies remain reluctant to make longer-term investments.

Consumers also showed signs of retrenching as the pace of personal consumption slowed to 2.0% from 2.8%, but did exceed expectations of a pullback to 1.8%. A drop in durable goods orders from 20.4% to -0.9% underlines the hesitation in making commitments to big-ticket items and long lasting goods which are typically funded through borrowing.

Banks remain reluctant to make loans and consumers and businesses shell shocked from the credit crisis may continue their risk adverse behavior. The robust growth despite a 0.2% drop in government spending may be the most significant happening, as concerns are that as stimulus efforts wane growth will stall, increasing the likelihood of a double dip recession.

Efforts to rebuild depleted inventories contributed 3.4 percentage points to GDP, the most in two decades.

Consumer spending, which comprises about 70 percent of the economy, rose at a 2 percent pace, more than anticipated following a 2.8 percent increase in the previous three months. Economists projected a 1.8 percent gain, according to the survey median.

Third-quarter purchases received a boost from the government’s auto-incentive program that offered buyers discounts to trade in older cars and trucks for new, more fuel- efficient vehicles. The plan expired in August.

Household purchases dropped 0.6 percent last year, the biggest decrease since 1974.

Increases in production last quarter stemmed the slide in inventories. Stockpiles dropped at a $33.5 billion annual pace following a $139.2 billion decline the previous three months. Inventories declined at a record $160.2 billion pace in the second quarter.

Today’s report showed purchases of equipment and software increased at a 13 percent pace in the fourth quarter, the most since 2006. The gain helped offset a 15 percent drop in commercial construction, leaving total business investment up 2.9 percent over the past three months.

Today’s GDP report is the first for the quarter and will be revised in February and March as more information becomes available