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Big jump in GDP may veil weakness in economy

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By Steven Mufson
Washington Post Staff Writer
Friday, January 29, 2010; 9:45 AM

A year ago, the Union Pacific railroad was scouring the country for places to park its idle freight cars -- about 60,000 of them. With auto, coal and chemical shipments plunging, Union Pacific's chief executive, James R. Young, was also scouring the landscape for a bright spot.

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"We're so low right now and inventories are so low, if we do see a spark, things could pick up pretty quick," he said last February.

On Friday, the federal government announced a 5.7 percent jump in inflation-adjusted gross domestic product for the last quarter of 2009 -- more than analysts expected. But from his perspective in the rail yard, Young is wondering just how much spark the economy really has.

Union Pacific still has 44,000 idle freight cars and 1,700 idle locomotives. And its freight car loadings are still running nearly 20 percent below the peak levels of a couple of years ago. Young worries that what's really behind the pickup in GDP numbers is that companies have stopped running down inventories and their actual sales to customers haven't changed much.

"I'd say things are stable and maybe there are some signs of strength, but we've got a long ways to go," Young said Thursday.

The example of Nucor

Many economists agree and warn against reading too much into the jump in GDP figures. Ed Yardeni, president of Yardeni Research, said that even if there were no change in final sales of goods, the GDP figures would show a 4 percent increase simply because businesses that were emptying their warehouses a year ago are now buying enough goods to keep stockpiles steady.

"A lot of it is the arithmetic of inventories," said Yardeni, who had expected a 6.5 percent jump in the GDP number. "Even if there is a very strong number for the fourth quarter, if it's [all because of] inventories, it will raise real questions about the strength of the economy in 2010."

Nucor is a good example. Reeling from the downturn last year, the Charlotte-based steelmaker practically stopped buying pig iron, which it uses as raw material. Instead it used up much of the pig iron it had stockpiled for normal times and suddenly didn't need. For the last quarter of 2008 and the first three quarters of 2009, Nucor bought infrequently.

Now, said the company's chief executive, Daniel R. DiMicco, "we've worked them down to the absolute minimums necessary to meet the demand of market." So the company has gone back to buying more regularly. But steel demand remains weak, and Nucor's mills are running at a little over 60 percent of capacity.

"We're keeping things lean like all our customers," said DiMicco.

DiMicco said that "nothing's really changed in our opinion from the standpoint that the economy is going to be very slow in growing out of this serious recession that we've had."

One of the key indicators that executives say they are watching are employment figures, which remain weak.


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