US sees biggest GDP growth in six years

The US economy expanded in the last quarter of 2009 at a pace of 5.7 percent, the fastest growth rate in six years, according to the Commerce Department. But this blistering growth rate is unsustainable, economists warn, and is unlikely to result in a spurt of hiring.

Most of the reported growth in the economy came from a huge shift in inventories, economists say. Corporations had been running down their stockpiles, but by the fourth quarter they were depleting them at a far slower pace. Stripping out inventories, the Gross Domestic Product (GDP) grew a modest 2.2 percent int e fourth quarter.

“We seem to be going strong but we are not,” says Joel Naroff of Naroff Economic Advisors in Holland, Pa. “That’s why I’m calling it a head-fake.”

Confidence boost

Even so, the headline growth rate may have some positive effects. Consumers may become less cautious – a shift that is already starting to show up in confidence surveys. The stock market rose Friday morning after the release of the report, which was significantly better than most Wall Street economists had predicted.

And it may be one more factor that helps to stabilize employment.

The growth rate numbers are unlikely to result in any major policy changes at the Federal Reserve, experts say. The Fed met this week and kept short-term interest rates at near zero percent. “The Fed won’t take the head-fake,” says Mr. Naroff. “They’ve seen that move before.”

The White House took some of the credit for the positive tilt to the economy. “This broad-based rise in GDP was surely fueled in part by the tax cuts and investment spending in the Recovery Act and other rescue actions...,” said Christina Romer, chairman of the Council of Economic Advisors, in a statement released by the White House Friday. She added that some private-sector demand also appears to be returning.

Surge in hiring unlikely

But an improved GDP, by itself, is unlikely to result in businesses posting "help wanted" signs.

“Overall, the best we can say is, the layoffs are slowing down,” says Sung Won Sohn, an economist and professor at the Martin V. Smith School of Business, part of the California State University, Channel Islands. “Hiring is not going to be surging anytime soon.”

That’s one reason President Obama was in Baltimore Friday morning to reveal the specifics of a proposed tax incentive to get small businesses to hire new workers.

“This policy is designed to encourage businesses to respond to rising demand and output by taking the plunge and hiring new workers again,” said Ms. Romer.

Separately on Friday, the Department of Labor reported that wages and benefits paid to the workforce rose 0.5 percent in the fourth quarter. For all of 2009, they rose 1.5 percent, the lowest gain since 1982. Part of the new Obama plan announced Friday is designed to give small businesses a tax credit if they increase wages.

Some economists say the best policy might be patience. The economy has gone from a free fall to a growth rate of 4 percent in the second half of 2009, points out Richard DeKaser of Woodley Park Research in Washington, D.C. “That is a meaningful turnaround,” says Mr. DeKaser. “Further action may be required, but at this point, evidence suggests things are very much on schedule.”

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