GDP: Fourth Quarter 2009

This morning the Bureau of Economic Analysis (BEA) released its second estimate for 2009 4th quarter gross domestic product (GDP), which they estimated at just under $14.5 trillion. GDP measures the output of domestically-produced goods and services. The real (inflation-adjusted) GDP increased at an annualized +5.9% from the third quarter, a jump from the previous quarter’s +2.2% increase. And while annual GDP decreased -2.4% from 2008 to 2009, last quarter’s GDP was +0.1% higher than the 4th quarter of 2008. The current report indicates positive shifts in a number of important areas, and is consistent with a country beginning to claw its way out of recession.

GDP is divided into four broad categories: personal consumption, private investment, government spending and net exports (the difference between exports and imports). The largest increase from the prior quarter came from private investment, which increased an astounding +48.9%, thanks in part to improvement in private inventories (after a -23.1% decrease over all of 2009). The change in private inventories accounted for 64% of the total change in real GDP. Both this change and the +2.8% increase in consumption of goods reflect the improved consumer spending as well as anticipated spending. They also demonstrate what I discussed yesterday in my email article – that both recessions and recoveries are driven by business spending, not consumers. Consumers buy after Corporate America: if Wal-Mart is re-stocking their inventory, they do so because they are expecting us to buy more of their products.

As for government expenditures, which include federal and state/local spending, you may be surprised to learn that they decreased by -1.2% from the prior quarter. State and local governments decreased spending by -2.0% while the federal government increased spending by +0.1%. Federal government spending is broken down into defense and non-defense spending, which dropped -3.5% and increased +8.3%, respectively. The fact that a small decrease in defense spending and a large increase in non-defense spending effectively negate one another shows how much of our discretionary spending (64%) is devoted to national security.

Another favorable economic indicator from the recent GDP estimates is the increase in both exports and imports. While we are still running a trade deficit of -$347 billion, we can take some solace in the fact that exports increased +22.4% from the previous quarter while imports rose +15.3% over the same time period. This capped off a 2009 that saw a +$138.9 billion increase in net exports (a decrease in the trade deficit) from the previous year and a fourth quarter increase of +$10.3 billion. Historically, a substantial increase in both imports and exports is a strong indicator of economic recovery.

While it is promising to finally see significant growth in consumer spending, private investment, exports and other important areas, it only means things are headed in the right direction. Last year’s real GDP is still a -2.4% decrease from 2008. We are definitely on the road to recovery, but we still have a ways to travel to get there.