According to the “advance estimate” of the U.S. Bureau of Economic Analysis, real (inflation-adjusted) gross domestic product leapt forward 5.7% in 2009’s fourth quarter versus the third, on an annualized basis. Leading the way were the change in non-farm inventories and goods exports. The former was the result of a significantly lower drawing down of stockpiles. The latter was the result of progress in terms of world economic recovery and the decline in value of the U.S. dollar. These are both expanding the scope of foreign markets and increasing the price-competitive nature of American products being offered for sale in out-of-country transactions.

The investment figures

The residential investment figure was +5.7% quarter over quarter annualized. This was the second increase after 14 straight quarters of often double-digit percentage rate declines. Investment in non-residential structures was -15.4%, illustrating the degree to which private sector financing has gone into retreat. Public sector stimulus money has tried to fill in the gap, but a lot of it has been sidetracked into state and local operating budgets. The latter has become necessary due to the shortfall of tax revenues in the depths of the recession.

The non-residential investment figure also illustrates how construction is the last sector to participate in an economic expansion. Employment lags in a recovery because firms want to be sure that business conditions have really improved before they hire back workers. Even later than the improvement in labor markets, however, is the need to expand productive capacity.

Explaining the inventory cycle

As for the inventory cycle, it is not so much that levels are being rebuilt as that they have been adjusted downward to where they should be, based on current sales. The fact that they have bottomed out provides a significant swing in the inventory-change figure within the national accounts. Demand for product will require output expansions. Medium- and longer-term, it is a natural function of business to expand inventories as sales pick up in a growing economy.

Some other highlights from the report include personal consumption expenditures at +2.0% quarter to quarter annualized. This was comprised of durable goods at -0.9%, non-durable goods at +4.3% and services at +1.7%. Motor vehicle sales have been doing better within the durables category, but orders in the aerospace sector have been suffering some setbacks of late. In terms of net foreign trade, goods exports at +28.1% were well ahead of goods imports at +14.5%.

Is the recovery self-sustainable yet?

The speculation going forward will now clearly center on whether or not the U.S. recovery is self-sustaining. The seven million people unemployed, plus others who have dropped out of the labor force until hiring conditions improve, will continue to act as a drag on consumer spending. However, employment will gradually improve. Lower initial jobless claims are already pointing in that direction. They have dropped below the 500,000 benchmark at which firings equal hirings. The Federal Reserve will be keeping a vigilant eye on inflation. If there are indications that it may escape from its holding pen, the Fed may have to act sooner than it wants to.