The topline number for GDP growth in the 4th quarter of 2009, that the economy expanded by 5.7%, sounds like great news. It was the strongest growth since 2003. But 3.4% of that came from a one-time shot of inventory investment. There’s basically a rubber-band effect. When the economy sunk in 2008-09, businesses depleted their inventories because they couldn’t afford to keep people working in either manufacturing, shipping or distribution when nobody was buying. As the economy has slowly returned to life, those inventories needed to be built up again. The drawdowns in inventory made the decrease in GDP look worse than reality during the recession, and the inventory restoration makes it look better than reality now (Quick clarifying note: It appears businesses are still drawing down inventories, just at a much slower rate).

And now that inventories are basically back to a normal level, as Calculated Risk says the question is where the economy goes from here.

In addition, if the economy can grow at a 5.7% rate in a quarter, and no net jobs are created, something is really, really wrong. People need to wrestle with that.

Keep in mind that the initial growth number for Q3 2009 was 3.4%, and it eventually was downgraded to 2.2%.

UPDATE: Dean Baker has an interesting take:

While the economy is now growing, it is striking how much damage was
caused by the recession. Net domestic product (GDP minus depreciation) was still 0.3 percent lower in the fourth quarter of 2009 than in the fourth quarter of 2006. The drop in net domestic income was even more dramatic, with the third quarter level (4th quarter data is not available yet) being 0.3 percent below the level of the second quarter of 2005. Such prolonged downturns have not occurred since the Great Depression.

The jump in output, combined with near flat hours worked in the quarter, will lead to another impressive productivity number when the Labor Department releases the data next week. There is no reason to believe that this will presage a burst of hiring. In fact, the latest data on unemployment insurance filings indicate that the economy is still shedding jobs. With final demand growth remaining weak, there is little prospect for a turnaround of employment in the near future.

Net national income in the 3rd quarter was 0.3 percent below the level in the 2nd quarter of 2005.

UPDATE II: The numbers point to positive job growth by February or March, according to this analysis.

UPDATE III: Paul Krugman: The Blip Cometh.

David Dayen

David Dayen

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