5.6% annualized growth is best in six years By Rex Nutting, MarketWatch WASHINGTON (MarketWatch) - The U.S. economy grew at the fastest pace in six years during the final three months of 2009, fueled by a huge inventory adjustment, strong business investments and modest consumer spending, the Commerce Department estimated Friday. U.S. real gross domestic product increased at a 5.6% annualized pace in the fourth quarter, revised down from the 5.9% pace reported a month ago. The government provides three estimates of economic growth, each reflecting more complete information than the last. In the past year, real GDP has risen 0.1%. For all of 2009, GDP fell 2.4%. The revision was largely in line with expectations of economists surveyed by MarketWatch, who figured GDP would be revised down to 5.7%. Compared with the previous estimate, the government estimated smaller investments in business structures, spending on services, and inventory investments. Final sales of domestic product increased at a 1.7% annual pace, revised from 1.9% reported earlier. Domestic sales increased at a 1.4% pace, an indication that domestic demand remains tepid despite the stellar top-line growth. About two thirds of the growth in GDP in the fourth quarter was accounted for by changes in inventories, not by final sales. Businesses had been reducing their overstocks at the fastest pace in generations earlier in the year, and then sharply slowed the pace of reductions in the fourth quarter. The change in inventories accounted for most of the fourth-quarter growth. For the current quarter, which ends next week, economists are forecasting a slowdown to 2.8% annualized growth. They expect growth will be more balanced than in the fourth quarter, with a larger contribution from sales and less from the inventory adjustment. Most economists we surveyed believe growth will slow in 2010 to about a 3% pace as the temporary boost from inventories wanes. The impact of fiscal and monetary stimulus will also lessen, or turn negative. They expect modest growth in consumer spending and business investment as consumers struggle against high unemployment, flat incomes and the need to pay down debts. Aside from the revisions, the report released Friday also contained some new information about corporate profits. In the fourth quarter, before-tax profits increased $108.7 billion, or 8%, compared with the third quarter. Compared with a year earlier, before-tax profits were up 30.6%, the best year-over-year increase since 1984. After-tax profits increased 22.8% in the past year. Net cash flow increased $69.1 billion in the fourth quarter, or a 4.4% increase from the third quarter. More details Even with healthy growth in the second half of the year, it was the worst year for GDP since the 10.9% drop in 1946, when the United States geared back to a peacetime economy. The economy shrank 2.4% after adjusting for inflation in 2009 compared with 2008, the government said. In current dollar terms, GDP rose 6.1% annualized in the fourth quarter to an annual rate of $14.46 trillion. For all of 2009, GDP totaled $14.26 trillion, down 1.3% from 2008. It was the largest decline in current-dollar GDP since 1938.

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