Thread: Economy sees biggest gain in 6 years

Economy sees biggest gain in 6 years

Mar. 26, 2010 07:00 AM
Bloomberg News

March 26 -- The U.S. economy expanded at a 5.6 percent annual rate in the fourth quarter of 2009, and corporate profits climbed, setting the stage for gains in employment that may broaden and preserve the expansion.

The rise in gross domestic product, while smaller than the governments previous estimate issued last month, marked the best performance in six years, figures from the Commerce Department showed today in Washington. Company earnings increased 8 percent, capping the biggest year-over-year gain in a quarter century.

Profits are a leading indicator of the economy and suggest continued growth and likely job gains in the second quarter of this year, John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said in a note to clients after the report.

Caterpillar Inc. and Boeing Co. are among manufacturers seeing demand strengthen as business investment, consumer purchases and exports keep climbing, indicating the recovery is being maintained this year. Federal Reserve Chairman Ben S. Bernanke, citing weak labor and housing markets, yesterday said the worlds largest economy still needs low interest rates to sustain growth.

Stock-index futures trimmed earlier gains following the report. The contract on the Standard & Poors 500 Index rose 0.3 percent to 1,165.8 at 9:02 a.m. in New York. Treasury securities were little changed.

Less Than Anticipated

The economy was forecast to grow at a 5.9 percent annual pace, the same as the government estimated in February, according to the median estimate of 76 economists in a Bloomberg News survey. Estimates ranged from gains of 5.5 percent to 6 percent.

The downward revision last quarter reflected larger decreases in commercial construction and stockpiles, and a smaller gain in consumer spending than estimated last month.

For all of 2009, the economy shrank 2.4 percent, the worst single-year performance since 1946.

Fourth-quarter corporate profits, reported today for the first time, increased by $108.7 billion to $1.47 trillion. Earnings jumped 31 percent from the same period in 2008, the biggest such increase since 1984.

Inventory Boost

Efforts to stabilize inventories provided the biggest boost to growth last quarter, contributing 3.8 percentage points to GDP.

Business investment in new equipment advanced at a 19 percent pace last quarter, the biggest gain since 1998. Spending on structures, including office buildings and factories, dropped at an 18 percent pace.

A Commerce Department report this week showed companies ordered more long-lasting goods from factories in February, driven primarily by bookings for commercial aircraft, machinery and metals. The gains suggest the manufacturing rebound will keep propelling the recovery even as commercial construction continues to slump.

Boeing, seeking to reclaim its title as the world's biggest commercial-plane maker, said this month it will boost production of its largest jets to meet increasing demand. There has been a dramatic pickup in air-freight shipments and passenger travel in the past four to five months, marketing chief Randy Tinseth said in a March 19 interview.

Hiring Pickup

Caterpillar, the worlds largest maker of construction equipment, also said this month it plans to hire 500 workers starting this year to expand a generator plant in Newberry, South Carolina. Caterpillar has started recalling some workers in Indiana and other states after cutting more than 19,000 jobs last year amid the recession.

Consumer spending, which accounts for about 70 percent of the economy, rose at a 1.6 percent pace last quarter, compared with the 1.7 percent rate forecast by economists and a 2.8 percent gain in the prior three months. Spending added 1.2 percentage points to GDP. Household purchases dropped 0.6 percent last year, the biggest decrease since 1974.

Purchases in the third quarter received a boost from the government's auto-incentive program that offered buyers discounts to trade in older cars and trucks for new, more fuel- efficient vehicles. The plan expired in August.

Auto sales this month may exceed a 12 million annualized pace, an improvement from February, according to analysts at J.D. Power & Associates and Edmunds.com. Gains in retail sales for January and February signal consumer spending will contribute more to GDP in the first quarter of 2010.

Jobs Needed

The job market is one part of the economy where a recovery has yet to take hold. Payrolls fell by 36,000 last month after a 26,000 drop in January. The U.S. has lost 8.4 million since the start of the recession in December 2007, the most of any slowdown in the post-World War II era.

Payrolls probably increased this month, according to the median estimate of economists surveyed before a Labor Department report due April 2.

The economy continues to require the support of accommodative monetary policies, Bernanke said yesterday in testimony to the House Financial Services Committee.

Responding to questions, Bernanke said the unemployment situation is very weak, with 40 percent of the jobless being out of work for a long time, and the housing market is still quite weak. Policy makers this month reiterated a pledge to keep the target interest rate on overnight loans between banks low for an extended period.

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