Economic Growth Soars; Good News For Collections

The U.S. economy grew at the fastest pace in more than six years during the fourth quarter as businesses made less-aggressive cuts to inventories and stepped up spending, according to a report today by the Commerce Department.

Gross domestic product rose at a 5.7% annual rate October through December. The rate was much stronger than expected. Economists surveyed by Collections & Credit Risk had predicted a growth rate of approximately 4.5%.

While the U.S. consumer proved to be somewhat of a bystander to the growth, personal consumption grew at just a 2% annual rate, "This is certainly good news not only for the economy, but for collection agencies and credit card companies," David Wyss, chief economist at Standard & Poor's tells Collections & Credit Risk. "The evidence is that consumers are paying off their debts, and that they're being cautious still about borrowing."

Consumer spending, which normally accounts for about 70% of economic activity, has been held back by the worst labor market in a quarter century.  Wyss believes personal spending will continue to lag until mid-year when he expects the unemployment rate to improve.

"Companies are still being cautious for now about hiring," he says. "We still expect a sluggish recovery until mid-year and we expect chargeoff rates will continue to rise as a result - through the first half of 2010."

Much of the GDP improvement was linked to a turnaround in inventories, the supply of goods that businesses produce in anticipation of sales. Businesses slashed inventories in late 2008 and early 2009 because of concerns about the recession. Business inventories fell only $33.5 billion in Q4 after dropping $139.2 billion in Q3. The change in inventories alone added 3.4% to GDP in the last quarter. This was the biggest percentage contribution since the fourth quarter of 1987.

Even with stripping out inventories, the economy expanded at an annual rate of more than 2.2%, accelerating from the 1.5% increase in the third quarter, reflecting relatively strong performance from other segments of the economy. A pickup in auto production also played a key part in the inventory turnaround, even though auto sales themselves only rose modestly. An 18% jump in the value of exports also played a major role in the economy's rebound, contributing nearly 2% of growth to overall GDP.

Getting the economy on a sustainable growth track remains one of the key challenges facing President Barack Obama, who on Wednesday outlined a raft of measures to create jobs and nurture the recovery. Separate from the Commerce Department report, newly released Labor Department data showed employment costs in the U.S. rose 0.5% in Q4. Wages and salaries, which make up about 70% of compensation, and benefits were both up 0.5%.

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