U.S. Economy Distancing Itself from Great Recession - BMO Economics

/PRNewswire/ -- U.S. real GDP rose a much stronger-than-expected 5.7 per cent annualized in Q4, building on a modest 2.2 per cent advance in Q3, and a far cry from the 5.4 per cent slide of a year ago.

"The advance in exports, personal consumption and business capital spending points to some positive momentum in the economy," said Sal Guatieri, Senior Economist, BMO Capital Markets. "First-quarter GDP growth should top 3 per cent, further distancing the economy from the Great Recession, and encouraging firms to resume hiring."

More than half of the quarterly increase reflected inventory rebuilding, with an assist from net exports. Exports soared 18.1 per cent, even topping the prior quarter's sharp gain, amid support from an upswing in global demand and a weak dollar. Final sales (GDP ex-inventories) strengthened to 2.2 per cent, though final domestic demand weakened a bit to 1.7 per cent. The latter reflected a moderation in consumer spending (2.0 per cent), after the cash-for-clunkers auto program boosted sales in Q3. However, the underlying rate of consumer spending, though still soft, looks to have picked up.

Government spending was also weak due to ongoing retrenchment at the state level and a pullback in defense spending. Non-residential construction remained in the dumps, sliding 15.4 per cent. The main upward surprise in the report came from a 13.3 per cent surge in business equipment spending, the fastest in nearly four years. Recent strength in capital goods orders, coupled with the President's proposal to provide investment tax credits, point to ongoing strength ahead. Residential construction also advanced further in Q4, despite a recent pullback in housing starts.

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Analysis of GDP by Bart van Ark, Chief Economist of The Conference Board

/PRNewswire/ -- The expansion in Q3 GDP (3.5%) shows we have clearly begun to emerge from the trough. But there's still a long way to go, and we still don't know enough about the sustainability of these recovery signals. The comparatively good Q3 news is largely driven by temporary factors like an uptick in consumer spending -- notably through the U.S. government's "cash for clunkers" car sales subsidy program -- as well as an easing in inventory rundowns.

Q4 could bring even faster easing in inventory rundowns that accounts for all GDP growth (we forecast 3.1 percent). Consumer spending will fall flat during the holiday season, and exports will recover more slowly than in Q3. Any modest uptick in investments in equipment and software will most likely be offset by continued declines in commercial real estate.

A less powerful inventory boost with no positive offsetting contributors may well limit GDP growth to 1 percent in early 2010. We forecast growth to improve only moderately, to around 2 percent, by the middle of 2010. The savings rate will remain relatively high at 4.5 to 5 percent of disposable income, dampening improvements in real consumer spending, investment and trade.

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