Growth Hits 6-Year High

By JUSTIN LAHART The U.S. economy grew at its fastest pace in six years in the last three months of 2009, expanding at a 5.7% yearly rate over the previous quarter, as businesses drew less from their stockrooms and stepped up purchases of equipment and software. Exports surged and consumers spent more. But the pace of the recovery is unlikely to continue as strongly once the temporary jolt from the inventory drawdown passes and government stimulus fades, keeping unemployment high through the end of the year. "You get a one-off boost, but that's not going to be repeated in the first quarter," said Michael Carey, chief economist at Calyon Securities in New York. Of the 5.7% rise in gross domestic product, 3.4 percentage points came from businesses shrinking inventories more slowly than in the previous quarter. That's a plus for economic growth: When businesses pull fewer goods from warehouses, they have to produce more. Total inventories fell at an annual rate of $33.5 billion in the fourth quarter, compared to a $139.2 billion reduction in the previous quarter. Stocks jumped higher following the report, but finished the day down despite the news of the growth spurt. The Dow Jones industrial average fell 53.13 points, or 0.52%, to 10067.33. In Washington, reaction was subdued as policymakers focused on the high unemployment rate. "We need to be vigilant that this increase in GDP translates into an immediate increase in jobs," said Rep. Caroline Maloney, the New York Democrat who chairs the Joint Economic Committee. Manufacturers and distributors are benefitting from the inventory-related bounce. But they are treating it cautiously and don't seem to be in a rush to hire. "I'm not seeing much of a recovery right now," said Clint Binley, president of Pallets Inc., a maker of wooden pallets in Fort Edward, N.Y. Orders have picked up, said Mr. Binley, but rather than hiring more workers, he has increased hours. He says he doesn't foresee hiring anyone this year. Collings Guitars Inc., a maker of acoustic guitars and other instruments in Austin, Tex., has seen an inventory-related uptick in orders. Hit during the downturn, many guitar shops cut the number of instruments they had on hand, and Collings saw orders drop. Now stores are restocking, and orders are bouncing back. "I can't just ramp things up to meet that," says general manager Steve McCreary. After logging fewer hours last year, Collings 66-employee workforce is spending more time on the clock. Mr. McCreary is also looking to add a few people. The U.S. economy began contracting in the first quarter of 2008. It eked out a bit of growth in the second quarter of that year and then contracted sharply over the ensuing four quarters until growth returned at a 2.2.% annual rate in the third quarter of 2009. Even after the fourth-quarter gain, GDP remains 1.9% below its peak 2008 level. After inventories, an increase in consumer spending was the largest contributor to GDP growth in the fourth quarter. Consumer spending grew at a 2% annual rate, the Commerce Department said. That was down from the third-quarter, when spending grew at a 2.8% rate, boosted by auto sales related to the government's cash-for-clunkers program. Sales of goods besides autos grew at a faster clip than in the third quarter. That suggests households are spending more freely, said Barclays Capital economist Dean Maki. "That is likely because wage and salary income is improving," he said. "Consumers are spending the additional money." The Labor Department said Friday that wages and salaries of civilian workers rose a seasonally adjusted 0.5% in the fourth quarter. That was the largest increase in over a year, but was muted by historic standards. Separately, the Reuters/University of Michigan consumer sentiment index rose to 74.4 for January from 72.5 in December. That's up from a low of 56.3 last February, reflecting improved confidence among households. But it's still well below its levels prior to the recession's start in December 2007. "I tend to watch what I'm buying a bit more," says Wade Walter, 34, of Jacksonville, Fla., who works the deli counter at a Costco, the big-box discounter. "I'm not just buying DVDs or games or going out as much as I used to. I don't want to say I'm buckling down, but I put my money into things that are more worth it, or put it in the bank." Lost wealth and tight credit are keeping household spending in check. This suggests Americans are likely to increase their spending only once companies step up hiring and wages. That leaves the recovery more dependent on firms' confidence than in past upturns, when increases in consumer spending helped lead recoveries. One sign from the GDP report of improved confidence at companies was a annualized 13.3% increase in spending on equipment and software—the biggest gain in nearly four years. In the past, rises in capital spending have tended to signal an increased willingness to hire. When it reported results for its most recent quarter on Wednesday, Rockwell Automation Inc., a leading producer of factory-automation equipment and software, said it expects revenue of $4.4 billion to $4.6 billion for its fiscal year ending September, better than the $4.1 billion to $4.4 billion it previously forecast. "We believe we are at the start of a recovery," said Rockwell CEO Keith Nosbusch. "Our goal is to be very successful as it returns." But the company is cautious, and has increased hiring only slightly despite its expectation for better sales.