When the Roman poet Phaedrus cautioned that "things are not always what they seem; the first appearance deceives many," he could easily have been describing the latest report on the U.S. economy.
According to a report released Friday, U.S. gross domestic product (GDP) expanded at a 5.7% annual rate in the fourth quarter, exceeding most estimates. But many economists are skeptical that such growth is sustainable. In fact, many analysts say the numbers are downright misleading.
Roughly two thirds of the growth came from businesses restocking inventories. Efforts to rebuild inventories contributed 3.4 percentage points to GDP growth – the most in two decades. But there wasn't a lot of "sell-through." In fact, excluding the change in inventories, final sales increased at a 2.2% annual rate, a signal that the economy remained weak despite strong top-line numbers.
"When you strip out inventories, you see real final sales were 2.2%. This is not a fantastic number," said Tom Porcelli, senior economist at RBC Capital Markets (NYSE: RY). "If you compare this to the '75 and '82 recessions, [and look at the] real final sales in the first two quarters after, we averaged 5% after the '82 recession, and about 4% after the '75. By comparison, we obviously are looking pretty weak."
And now that businesses that ran down inventories during the recession have restocked themselves, it's unrealistic to think they'll continue to drive growth over the next year. That means additional growth will have to come from someplace else. But don't expect consumers to be much help.
In healthy economic periods, consumer spending accounts for as much as 70% of the nation's economic growth. But consumer spending rose at just a 2% annual pace in the fourth quarter, down from a 2.8% pace in the three previous months. Household purchases fell 0.6% last year – the biggest drop since 1974 – as the national jobless rate hit the double-digit level for the first time in two decades.
"It's an encouraging recovery sign, but there's a difference between Wall Street encouraging and Main Street encouraging," Dan Egan, president of the Massachusetts Credit Union League, told Forbes.
Indeed, the data drove stocks higher Friday, but high unemployment, little job security and limited access to credit are still major problems for many Americans.
The consumer is essentially frozen, Egan added, and even those with jobs are looking over their shoulder and holding back on spending.
There's also a chance the fourth-quarter GDP number will be revised down. The annual growth rate initially reported by the government for the third quarter of 2009 was 3.5%, but was later revised to a much-less-impressive rate of 2.2%.
That's why Money Morning Chief Investment Strategist Keith Fitz-Gerald is forecasting U.S. GDP growth of no more than 2.0% for 2010.
The U.S. economy "will be lucky to do 2.0% " next year, Fitz-Gerald said. "The economy faces some very difficult challenges. There's a slight chance – depending on what happens with some outside factors – that the U.S. could do 2.5%, but I really doubt it. China could actually pull us along [to higher-than-expected growth], but those are some long odds."
News & Related Story Links:
Don't Rejoice Over Higher GDP Yet
- Money Morning:
U.S. Economy Will Dodge a Double-Dip Downturn, But Won't Escape Unemployment Woes During 2010 Jobless Recovery
- U.S. Commerce Department:
GROSS DOMESTIC PRODUCT: FOURTH QUARTER 2009 (ADVANCE ESTIMATE)
- Massachusetts Credit Union League:
Official Web Site