U.S. 4th Quarter GDP - Slower Decline Leads to Growth Only in the magic world of economic statistics can a slower rate of decline be declared as growth. It was just this sort of Alice in Wonderland logic that led to the U.S. government declaring that its fourth quarter GDP grew at a 5.7% annual rate. This number didn't result from actual economic growth per se, but from a slower rate of decline of inventories. While the 4th quarter GDP numbers are being used as 'proof' that the recession is over, the average American is likely to remain skeptical preferring a more reality-based criteria. Inventory numbers that were falling at a slower rate accounted for approximately 3.4% of the 5.7% GDP growth at the end of 2009. There has been a decrease in inventories for seven quarters in a row. Private businesses decreased inventories $33.5 billion in the fourth quarter, following a bigger decrease of $139.2 billion in the third quarter and an even bigger decrease of $160.2 billion in the second. While this number series looks like continuing economic decline, the Bureau of Economic Analysis (BEA) considers it growth because each drop is less than the previous one. If the American economy was actually healthy, inventories would be steadily increasing. Of course, they probably will have an increase in the next quarter or two. This will not necessarily mean the economy has turned the corner, it will mean that inventories can't go to zero. Other highlights from the report include a 2.9% increase in real nonresidential fixed investment, despite a decline of 15.4% in nonresidential structures. This was offset by a 13.3% increase in business equipment and software. One would think based on that number that U.S. business activity was humming along at a breakneck pace. BEA statisticians seem to be the only people who can find evidence of this however. They also calculated that that real residential fixed investment increased by 5.7% (something which had declined 14 quarters in a row prior to the 3rd quarter of 2009 because of weakness in the residential real estate market). The BEA also found that real exports of goods and services increased 18.1 percent in the fourth quarter, while real imports increased by only 10.5 percent. This would indicate a remarkable improvement in the U.S. trade deficit, which has existed continually since the 1970s. While December trade numbers haven't been released yet, October and November's figures didn't indicate any such rosy development. In addition to claiming that a decline in the rate inventories are falling represents growth, or that American business is in great shape, or the real estate market is recovering, the BEA also stated that government spending fell in the fourth quarter. Certainly a budget deficit for fiscal year 2010 (which started Oct 1, 2009) that is now estimated at $1.35 trillion seems to indicate fiscal probity and restraint on Washington's part. It is true that the deficit estimate was recently lowered from $1.5 trillion. Whether or not this is going to be reflected in less actual federal government spending, remains to be seen. The GDP report also stated that real GDP decreased 2.4 percent in 2009 after an increase of 0.4 percent in 2008. Before a multi-decade revision of GDP numbers in July 2009, the BEA had reported an increase of GDP in 2008 closer to 3%, a good growth rate for the American economy. Since it was universally acknowledged that the U.S. was in a severe recession during all of 2008, how could GDP have increased since a recession indicates negative growth? It's enough to make you wonder if U.S. GDP is being overstated by three to six percent.   Daryl Montgomery Organizer, New York Investing Meetup http://investing.meetup.com/21 This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.