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US GDP shows surprise gain, recovery seen

The recession-hit US economy expanded in the final three months of 2001, defying expectations for a contraction, as consumers rushed to buy new cars and government spending surged.

The fourth-quarter tally of gross domestic product, the broadest measure of the economy's health, strengthened beliefs that an economic recovery had already gotten off the ground.

The US Commerce Department said on Wednesday that GDP rose at an inflation-adjusted annual rate of 0.2 per cent in the fourth quarter. Private economists had predicted it would shrink one per cent.

"We are well positioned for a recovery here," said Diane Swonk, chief economist at Bank One in Chicago.

The data was seen as helping to solidify the Federal Reserve's decision on Wednesday to leave interest rates unchanged, which ended one of the most aggressive rate-cutting sprees in history.

The GDP data, along with soothing wording in the Fed's statement on rates, helped to push up stock prices but bond prices fell.

The blue-chip Dow Jones industrial average rose 145 points, or 1.5 per cent to 9,763. The tech-laden Nasdaq increased 20 points, or one per cent, to 1,913.

The Bush administration welcomed the economic report but did so guardedly. "We're much closer to the end of the recession than we are to the beginning of the recession," said Commerce Secretary Don Evans.

President George W Bush, in keeping with his State of the Union address on Tuesday, touted his proposal for tax cuts and other stimulus measures to jump-start growth.

"Today's GDP report is positive, but we cannot take growth and job creation for granted," he said.

A RECESSION-ETTE?

The economy has been in recession since March, but the downturn could prove to be one of the mildest in the post-World War Two era. The only negative quarter for GDP in the current slump was in the third quarter, when it fell 1.3 per cent.

"We almost have to look back and call this a recession-ette, rather than a recession," Swonk said.

"It will be very interesting to see the Fed's decision today, which may include them standing pat in terms of no move on interest rates, and there is a chance here they will now talk about risks being balanced between recession and recovery."

The new GDP number will be revised two more times within the next few months and the series will be overhauled yet again around mid-year as part of Commerce's annual revisions.

Fourth-quarter GDP was bumped into the plus column by rising government spending amid the war in Afghanistan, and also in other areas as consumers seized on the chance to get zero-percent financing on automobile purchases.

Amid strong consumer spending, companies ran through a whopping $120.6 billion worth of inventories, the largest drop on record.

"It's very consistent with the story that things were getting better in the fourth quarter and the stage is set for a recovery in the first quarter," said Bill Cheney, chief economist at John Hancock Financial Services in Boston.

"Inventories should bounce back and that will give us a quite strong positive lift in the first quarter," Cheney said.

INVENTORY-DRIVEN REBOUND SEEN

GDP during all of 2001 grew 1.1 per cent, the weakest performance since a 0.5 per cent decline in 1991 in the midst of the last recession a decade ago.

Experts said the fourth-quarter's enormous depletion of inventories bodes well for an economic rebound. Companies will need to crank up production to replace the goods that have been flying off store shelves and showroom floors, fueling GDP.

On the other hand, consumer spending could possibly have 'borrowed' some growth from the current first quarter as fewer people will now need to buy new cars.

Total consumer spending jumped 5.4 per cent in the fourth quarter, the biggest increase since the first quarter of 2000 when the economy was booming. Led by car-buying, spending on consumer durable goods skyrocketed 38.4 per cent, the biggest jump in more than 15 years.

In contrast to households, businesses kept a tight rein on their spending.

Business expenditures on new plants and equipment plunged 12.8 per cent in the fourth quarter, a worse showing than the third quarter's 8.5 per cent drop. Such spending fell in all four quarters of 2001.

Meanwhile, government spending grew 9.2 per cent in the fourth quarter, the biggest rise in 15 years. Exports of goods sank 12.4 per cent, while imports slid 3.4 per cent.

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