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US Economic Growth Spurts But Just What Is Its Composition?

The latest GDP numbers for the US economy seemed to hold a surprise for everyone and reason to cheer on the face of it. The fourth quarter growth for the US economy was reported at an annualized rate of 5.7%, by far the fastest growth rate in nearly six years. Economists were expecting a GDP growth rate between 4.5% and 5.5 percent for the last quarter of 2009 and the latest figures seem to have beaten their expectations.

The higher October to December 2009 growth rate was on the back of the final figure of 2.2% in the third quarter of 2009. While, this may appear to be a quantum jump, a close inspection of the composition of the GDP growth figures has its own story to tell. Also one must not forget that this figure is only the provisional figure and the revised figures will be available in the near future.

Taking a cue from the last quarter's figures, the final GDP growth figures turned out substantially lower than the initially released numbers. Even if we do not take into account what the revisions may take the GDP growth figure to, a large chunk of the present GDP growth is due to inventory adjustments. What that means is that due to the recession, US businesses had curtailed stocking goods due to the lower expected demand. The present surge in GDP growth is mainly due to restocking of these inventories.

A surge due to a simple inventory growth is not really a good indicator of sustainable growth. The component of inventory adjustment in the projected GDP growth figure of 5.7% is 3.4%. In fact, if inventory led growth and the foreign trade sector are removed from the GDP growth figure, domestic demand in the US probably rose only 1.7% on an annualized basis in the fourth quarter of 2009, down from the 2.3% annualized growth in the previous quarter.

Taking into account the third and fourth quarter positive GDP growth rates in the US economy, overall it shrunk by 2.4% in 2009 due to the negative growth in the first two quarters of 2009. This is the first annual decline for the US economy since 1991 and the biggest drop since 1946, when the US economy shrank by 10.9%. The constrained demand in the US economy seems to be a result of the weakness in the labor market, with the US unemployment rate at a high of 10%. The US has lost nearly 7.2 million jobs since December 2007 when the recession set in.

Mirroring the sentiment of constrained demand in the US was the December report for consumer spending, which suggested that consumer spending grew a paltry 0.2% in December, which is an important shopping month in the US due to Christmas and New years. The increase was also the smallest since September as per the Commerce Department, suggesting that a stable growth path is yet to set in. The high unemployment rate is likely to keep consumer spending constrained for some more time to come.

On the positive side, US exports jumped 18%, investments in homes and businesses also picked up. This suggests that US businesses are preparing to meet a gradually growing demand in the US economy and that the contribution of exports to GDP growth is helping create more jobs as well and helping diversify the over dependence of the US economy on consumer expenditure.

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