Economy Grew at Vigorous Pace in Last Quarter
The United States economy grew at its fastest pace in more than six years at the end of 2009, even as businesses resisted hiring and continued to do more with less.
A Lowe's store in North Little Rock, Ark. Businesses are letting their stockpiles shrink at a slower rate than they had been.
The broadest measure of economic activity, gross domestic product, expanded at an annual rate of 5.7 percent in the fourth quarter, after a 2.2 percent increase the previous quarter.
“It was an excellent report, but it’s not clear how sustainable this pace of growth is,” said John Ryding, chief economist of RDQ Economics.
The growth rate was the fastest since the third quarter of 2003, when the economy grew at a rate of 6.9 percent. But even 2009’s fourth-quarter surge was not enough to overcome a terrible start to the year. The economy finished 2009 with its biggest contraction since 1946, when the country was still cooling off from World War II.
The Obama administration seized on news of the latest upturn as an opportunity to push its proposal to encourage hiring. Companies would receive a tax credit of up to $5,000 for each new hire, and an additional credit on Social Security payroll taxes for raising wages — by increasing hourly pay or work hours, for example — in excess of inflation.
“Now’s the perfect time for this kind of incentive because the economy is growing, but businesses are still hesitant to start hiring again,” President Obama said in Baltimore.
The economy has been able to grow even without adding workers because employers have found ways to accomplish more with fewer workers. Productivity grew at a robust rate of 8.1 percent in the third quarter of 2009, the most recent data available.
The single biggest factor in the strong growth rate last quarter was not consumers buying more, but businesses letting their stockpiles shrink at a slower rate than they had been previously.
For example, a bike company usually keeps its warehouse well stocked. In tough times, it cuts production and sells what it already has in the warehouse.
When its financial worries ease, the company still does not fully replenish its warehouses, but it lets its inventories shrink at a slower pace.
Because of the way the government calculates growth, this business moderation translates into an increase in output. The change in inventories added 3.4 percentage points to the growth rate in the final quarter of 2009.
Those inventory changes alone cannot sustain growth over an extended period of time. Economists are hoping that once business executives become more confident about the recovery, they may increase production to refill their stockroom shelves.
“What goes down wildly has to go up at a pretty good clip,” said Robert J. Barbera, chief economist at ITG.
So far, though, final sales to consumers and businesses have been disappointing. Consumer spending grew at an annualized pace of 2 percent in the fourth quarter, after an increase of 2.8 percent in the third quarter. That is better than many had feared when the quarter began, considering the end of the cash-for-clunkers program that had helped stimulate auto spending. Still, in the past, consumption has been a much bigger driver of growth after a recession.
Many analysts foresee tepid growth in the months ahead. Ian Shepherdson, of High Frequency Economics, expects output to expand by just 1 or 2 percent, at an annualized rate, this quarter and next.
The biggest challenge in the near future is the job market.
On net, the economy lost 208,000 nonfarm payroll jobs last quarter, and the unemployment rate rose to 10 percent, from 9.7 percent. As long as the labor market remains weak, consumers — whose purchases make up the bulk of economic output each quarter — will be reluctant to spend money. That means businesses will need to look for other sources of demand, like exports.
Perhaps the most promising aspect of Friday’s report in terms of jobs was the pickup in equipment and software spending.
Businesses increased their investment in these areas at an annualized rate of 13.3 percent last quarter, compared with an increase of 1.5 percent in the third quarter.
“Businesses that are spending more on equipment and software are probably going to be hiring more as well,” said Nigel Gault, chief United States economist for IHS Global Insight. “If we see more hiring, that means we may see more consumer spending, too.”
Obama administration officials say they see other signs that output growth will eventually transform into job growth.
“Employers are seeing demand go up,” said Christina Romer, the chairwoman of the president’s Council of Economic Advisers. “They’re starting to hire temporary workers. We’re trying to get them to take the plunge and hire permanent workers. And do the hiring sooner rather than later.”
Total government spending fell slightly, by an annualized rate of 0.1 percent, from the third quarter to the fourth quarter, largely because of declines in military spending and state and local government spending.
Federal nonmilitary spending rose at an annual rate of 8.1 percent last quarter, after rising 7 percent the previous quarter.
International trade increased last quarter, and exports grew nearly twice as fast as imports, aided by a relatively weak dollar.
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