Economy grows for 2nd straight quarter at better-than-expected 5.7 pct rate, best since 2003

Christopher S. Rugaber, AP Economics Writer, On Friday January 29, 2010, 1:29 pm

WASHINGTON (AP) — The economy’s faster-than-expected growth at the end of last year, fueled by companies boosting output to keep stockpiles up, is likely to weaken as consumers keep a lid on spending.

The 5.7 percent annual growth rate in the fourth quarter was the fastest pace since 2003. It marked two straight quarters of growth after four quarters of decline. Growth exceeded expectations mainly because business spending on equipment and software jumped much more than forecast.

Still, economists expect growth to slow this year as companies finish restocking inventories and as government stimulus efforts fade. Many estimate the nation’s gross domestic product will grow 2.5 percent to 3 percent in the current quarter and about 2.5 percent or less for the full year.

That won’t be fast enough to significantly reduce the unemployment rate, now 10 percent. Most analysts expect the rate to keep rising for several months and remain close to 10 percent through the end of the year.

High unemployment and stagnant wage growth will likely keep consumers cautious about spending. Wages and benefits paid to U.S. workers posted a scant gain in the fourth quarter. And for all of last year, workers’ compensation rose by the smallest amount on records going back more than a quarter-century.

The economic recovery could falter if consumers, who account for 70 percent of economic activity, lack the income to ramp up spending.

“That’s why there’s so much hand-wringing right now,” said Brian Bethune, chief U.S. financial economist for IHS Global Insight. “Can the economy really sustain this? That’s the big question mark sitting out there.”

With hiring still weak, President Barack Obama has stepped up his focus on job creation. On Friday, he urged Congress to embrace his call for tax incentives to create jobs.

Obama wants to give companies a $5,000 tax credit for each net new worker they hire in 2010. Also, businesses that increase wages or hours for existing workers in 2010 would be reimbursed for the extra Social Security payroll taxes they would pay.

“It’s time to put America back to work,” the president told workers at the Chesapeake Machine Company in Baltimore. But he acknowledged that “while these proposals will create jobs all across America, we’ve got a long way to go to make up for the millions of jobs that we lost in this recession.”

About 60 percent of the fourth quarter’s growth resulted from a sharp slowdown in the reduction of inventories as firms began to rebuild stockpiles depleted by the recession.

Changes to inventories added 3.4 percentage points to the fourth-quarter growth, the Commerce Department said in its report Friday. Excluding inventories, the economy would have grown at a 2.2 percent clip, the government said. That’s an improvement from 1.5 percent in the third quarter.

Consumer spending rose 2 percent, down from a 2.8 percent rise in the third quarter. It added 1.4 percentage points to GDP growth.

A steep increase in exports also helped boost growth last quarter. The shipment of goods overseas rose 18.1 percent, far outpacing a 10.5 percent rise in imports. Net exports added 0.5 percentage point to GDP.

Government spending was actually a slight drag on growth in the fourth quarter: A small increase in federal spending was outweighed by a drop in state and local spending.

Still, federal government spending is likely to pick up and add to growth in the first quarter, Bethune said.

Business spending will likely boost economic growth for several quarters, Bethune said, though not likely enough to make up for sluggish consumer spending. Many companies are upgrading computers, cell phones and machinery as their equipment needs to be replaced just to maintain current levels of production.

In addition, many businesses have healthy balance sheets and don’t need to pay off the large debts that households are struggling with, Bethune added.

For now, the growing economy is benefiting companies up and down the supply chain. Ford Motor Co. this week reported higher fourth-quarter sales and its first annual profit in four years, as it recovers from the devastating downturn the auto industry.

Ford’s “recent success has benefited us,” said Tom Schumann, general manager of EC Kitzel & Sons Inc., a small cutting tool fabricator based in Cleveland, Ohio.

The company, which has 30 employees, bought a new machine tool in December and hired a new worker to run it, the company’s first hire since last spring. Still, many of the company’s suppliers are struggling.

“I’m not totally convinced we’re out of the woods yet,” Schumann said, referring to the economy.

Friday’s report is the first of the government’s three estimates of gross domestic product and is likely to be revised. The government initially estimated third quarter growth was 3.5 percent, which was later revised down to 2.2 percent. The next estimate will be released Feb. 26.

The report provided an upbeat end to an otherwise dismal year: The nation’s economy declined 2.4 percent in 2009, the largest drop since 1946. That’s the first annual decline since 1991.

source: Yahoo finance

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