The U.S. economy turned in a surprisingly good performance in the fourth quarter, surging ahead by 5.7 percent on an annual basis, according to a government report released Friday.

Or did it?

President Obama was quick to highlight the economy’s progress and “the swift and aggressive actions that made it possible.” At a manufacturing company in Baltimore, Md., Obama noted that last years’ massive economic stimulus program had also “stopped the flood of job losses.”

He also repeated his administration’s commitment to spur job growth to re-hire the 8 million workers sidelined by the worst recession in 60 years.

Most economists wouldn’t argue with those statements. With more $1 trillion in additional government spending, bank bailout investment and loan guarantees, on top of another $1 trillion-plus in pump-priming from the Federal Reserve, it would be surprising if that money didn’t register a strong showing as it moves through the economy and financial markets.

Friday’s GDP numbers follow a positive showing in last year’s third quarter, when GDP advanced 2.2 percent, along with other economic indicators showing signs of life in housing, industrial production and consumer spending, which is beginning to come back from the depths of the recession as confidence slowly recovers.

Corporate profits are also perking up. Of the 40 percent of companies in the Standard and Poor’s 500 that have reported earnings so far, roughly two-third have come in better than expected. Some small businesses are also reporting a pick up demand and have begun tentatively hiring back workers.

But when you look a little more closely at the numbers, it quickly becomes apparent that it’s hardly time to start breaking out the champagne. A big part of the latest GDP gain comes from a statistical adjustment for changes in inventory levels that don’t reflect real growth. Over the past year, businesses cut deeply into those inventories — not wanting to get stuck with unsold goods. Now that they’ve cut them to the bone, the rate of inventory-cutting has slowed. The way the GDP is calculated, that slowdown adds to “growth” — even though it doesn’t reflect increased production or sales. If you back out that inventory adjustment, GDP grew only 2.2 percent.

Friday’s report was the preliminary reading on GDP, which will be revised twice before it’s final. Last time around, the number for the third quarter of 2009 started out at 3.5 percent before pared back to 2.2 percent for the final report. That could well happen this time around.  Mike Englund at Action Economics thinks today’s number overestimated the drop in imports because the preliminary numbers may have overestimated the drop oil consumption. He says that accounted for a full percentage point of the 5.7 percent gain in the fourth quarter.

Even if the preliminary number holds through two rounds of revisions, few economists see that kind of growth as sustainable. A panel of economists surveyed by msnbc.com said they see U.S. GDP moving ahead at 2.7 percent this year.

Most of the credit for the boost in GDP has to go to the stimulus — along with the Fed’s historic moves to flood the system with cash and buy up mortgage bonds that no one else wants to touch. What’s far from clear is whether the rest of the economy’s gears will begin turning on their own — once the stimulus spending fades and the Fed turns off the money pump and begins soaking all that excess money.

Reversing course — from “easy” money to a “tighter” monetary policy — is going to be extremely difficult to pull off. If the Fed drains money too quickly, it risks stalling the recovery. If it drains too slowly, and keeps interest rates low for too long, it risks creating another bubble — or an outbreak of inflation. Home Security Systems.

Tags: action economics, economic indicators, gdp, inflation, us economy

This entry was posted on Saturday, January 30th, 2010 at 12:21 pm and is filed under Debt, Economic Turmoil, Global Economy, Global Financial, Global Recession, US Deficit, US Finance, US Inflation, World Financial. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.