U.S. economy grows at fastest rate in 6 years

By Neil Irwin
Washington Post Staff Writer
Saturday, January 30, 2010; A01

The U.S. economy grew at a breakneck rate of 5.7 percent at the end of 2009, the government said Friday, providing the strongest evidence yet that the nation will avoid a dip back into recession.

The growth spurt in gross domestic product, the broadest measure of economic activity, was the largest in six years. But economists cautioned that such a pace will probably not persist and that the economy will grow at a more measured rate in the coming months.

"We can now say that this is a sustainable recovery," said John Silvia, chief economist at Wells Fargo. "It's certainly not a boom, but it is a slow, steady recovery."

The fine print of the Commerce Department report did offer several pieces of promising news: Businesses invested more in equipment and software, exports rose at a healthy clip and consumer spending was stable. The recession, it is increasingly certain, ended over the summer.

But the biggest factor contributing to growth was that businesses, which remain slow to hire, were cutting back their inventories much slower than before. For two years, companies have aggressively reduced the goods on store and warehouse shelves, therefore producing less. After all those cuts, businesses now need to restock, which will spur more production.

The slower inventory drawdown accounted for more than half of the growth in GDP in the fourth quarter. GDP aims to capture the value of all goods and services produced within U.S. borders.

"Up until recently, whenever there was a pickup in demand, companies would go back to the stockroom and satisfy those orders by depleting warehouse shelves," said Bernard Baumohl, chief global economist at the Economic Outlook Group. "But at some point . . . you run out of things in the stockroom, so you have to start producing again, and that will increase GDP growth and lead to more hiring."

But the inventory bounce is temporary. So in months ahead, growth looks to be less spectacular.

Overall, growth came in a full percentage point higher than analysts' expectations, reflecting signs of strength beyond inventories.

The big question now is how long it will take the growth in output, which began over the summer, to lead to significant job creation. Forecasters are expecting job growth to begin this spring, perhaps by February or March. The employment numbers early in the year will get a boost from temporary hiring for the once-a-decade census.

So far, employers have fulfilled higher demand for their products by squeezing more work out of existing employees, leading to a productivity boom. But there are signs that they may not be able to do so any longer. Employment at temporary services, for example, has risen in recent months, a sign that companies, if not confident enough to hire permanent workers yet, are at least adding temps.

The largest component of GDP -- and of overall economic activity -- is consumer spending, and the data released Friday showed that consumption by Americans is clawing back to more typical levels. Spending for personal consumption rose at a solid 2 percent annual rate, with a particularly steep rise in purchases of nondurable goods -- items such as groceries and clothes that are expected to last fewer than three years.

The consumption data are consistent with reports from retailers, who say that Americans are no longer holding their wallets quite so tightly even if they've yet to revert to 2007 buying levels. The Conference Board said Friday that consumer confidence rose to a two-year high this month.

"Consumers are doing their part in this economic recovery," said Sung Won Sohn, an economist at California State University. "The employment market is the main problem facing consumers and the economy. However, the job market is in the process of stabilizing."

Businesses also are becoming more confident. After two years of dramatic reductions in investment, spending on equipment and software rose at a 13.3 percent annual rate in the fourth quarter, the second straight quarter of increase. Companies can cut back on equipment spending only so much before new spending becomes a necessity, as software becomes obsolete and machines break down. The moment when companies have no choice but to make new investments may have arrived. This heightened confidence may also inspire more hiring.

The exception is in real estate, where investment spending on structures such as office buildings and warehouses fell at a 15.4 percent rate, reflecting a vast oversupply of commercial buildings.

Housing investment continued contributing to growth, rising at a 5.7 percent rate, the second quarter of gains after 14 consecutive quarters of decline.

And exports rose at a healthy 18.1 percent annual rate, reflecting in part the lower value of the dollar.

Massive government spending to support the economy provided no net boost to overall growth. While non-defense federal spending rose at an 8.1 percent rate, spending on defense and by state and local governments was down sharply.

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