South By North Strategies, Ltd.

Advance estimates from the U.S. Bureau of Economic analysis show that real gross domestic produce (GDP) grew at a 5.7 percent annual rate between October and December 2009.  This is the second consecutive quarter of GDP growth.

Real GDP is driven by four broad factors: personal consumption expenditures (PCE), gross private domestic investment, net exports, and government spending in investment.

Last quarter,  gross private domestic investment — particularly inventory adjustments — was the main driver to GDP, adding 3.8 percentage points to the quarterly change. More specifically, changes in private inventories contributed 3.4 percentage points to to the quarterly change in real GDP. The other major contributor to quarterly growth was PCE, which added 1.4 percentage points to the quarterly change. Positive changes in net exports contributed slightly to quarterly growth, and changes in government spending subtracted slightly from quarterly growth.

Many observers will look at the positive GDP report — which is subject to two further revisions — and claim that the recession has ended. This is misleading. Although positive GDP growth is welcome news, it is unclear if this path is sustainable. Much of the change was driven by what appears to be a one-time change in inventory levels. Additionally, the 4th quarter results were still heavily influenced by federal recovery spending, such as depreciation bonuses for businesses and the homebuyers tax credit (originally slated to expire at the end of November).

Now that public supports and other elements of the recovery package are phasing out, it is unclear whether the economy will be able to maintain robust real GDP growth on its own. High levels of unemployment suggest that PCE will contract while weaknesses in residential and nonresidential real estate likely will retard activity in those areas.  And the expiration of federal aid to the states and weak revenue collections likely will restrain state and local government spending.