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Monday, February 1, 2010

Sometimes Rapid Economic Growth Is Less Than It Appears To Be by Dr. Douglas O. Walker

The Bureau of Economic Analysis of the Department of Commerce announced Friday morning that economic growth in the U.S. jumped considerably at the end of 2009. According to its Advance Estimate, measured aggregate output grew at an adjusted annual rate of 5.7 per cent in the fourth quarter, considerably faster than the 2.2 per cent pace registered in the third quarter. This is the fastest pace of economic growth in six years. Technically, it may well mean that the recession is over and a recovery, albeit a slow and precarious one, may be at hand.

The rapid pace is in fact less robust than it appears to be. A slowdown in inventory liquidation explains in some 3.4 percentage points of the 5.7 per cent rise in GDP, meaning that many firms were drawing down inventories more slowly than in the fourth quarter they had been during the previous quarter. Real final sales, which unlike inventory change, drives economic growth over the longer-term, accounts for the rest of the reported increase in GDP and it rose only at a annual rate of 2.3 per cent. Expenditures by consumers grew less than expected but nonetheless contributed 1.4 percentage points to GDP. Business spending and international trade also rose a bit to boost GDP. One surprise was the slow increase in government spending, which rose only 0.1 per cent.

In terms of growth performance for the year as a whole, 2009 was the worst year on record since 1946. On the basis of the preliminary data reported today GDP declined 2.4 per cent during the year. While the carryover effects of the momentum of recent months will be positive, any boost from inventory change is usually transitory at the beginning of a recovery and the underlying trend rate may well be very weak. Weak economic growth in 2010 means slow progress in dealing with the high unemployment now prevailing from the East Coast to the West.

As reported in the RSG World Economic Brief, released the same morning, the United Nations expects the U.S. recovery to be weak, with an average rate of increase of a little over 2 per cent in 2010, a figure consistent with the data released by the BEA. While growth in the U.S. is slow, it is better than that expected in Europe and Japan and in the economies in transition that comprise the former Soviet Union. Developing countries, on the other hand, are forecasted to have a strong recovery from the worldwide recession of 2009. Details are in the Brief.

Here are links to the News Release on the GDP and some comments by economists that closely follow trends and developments in the economy:
  1. The News Release by the Bureau of Economic Analysis on Fourth Quarter GDP.
  2.  Professor James Hamilton of the University of California, San Diego, offers a somewhat positive take on the inventory liquidation while also taking a "wait and see" attitude how it all works out.
  3. At Calculated Risk, Bill McBride, a retired senior executive with a background in economics and finance, called the sharp rise in growth more than a week ago but at the same time cautioned against over optimism for the year 2010 as a whole. A tip of the hat to him.
  4. On the West Coast, Brad DeLong, professor of economics at the University of California, Berkeley, points out the relationship between GDP growth, productivity and unemployment in the just released numbers and doesn't like what he sees.
  5. Finally, Josh Bivens at the Economic Policy Institute thinks the latest numbers are just a blip and have to be taken with a grain of salt. It's not only that in his view this rate of growth is unlikely to last, he points out even if it were to be sustained it is too low to make a substantial dent in the 10 per cent unemployment rate that now plagues the economy.

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