U.S. economic growth appears to have moved on to a much faster trajectory in the last quarter of 2009, exactly a year after the Wall Street turmoil in the last quarter of the prior year.

According to numbers released by the Commerce Department this morning, the U.S. economy grew at a faster-than-expected 5.7% rate in the final three months of 2009, handily beating the expected 4.8% growth rate.  This was the fastest economic growth since the start of 2006.

Not only is the headline economic growth number very good, but the report’s internals also has a number of encouraging aspects on economic development. We knew that the fourth quarter economic growth was to be driven by inventories-related activities, slower liquidations and build-up. While slower inventory liquidations and/or the start up of new inventory build-up did contribute a major part of the fourth quarter growth, we also saw a better-than-expected contribution from capital expenditures and consumption.

We shouldn’t get used to this emerging-markets type of economic growth in the coming quarters, driven as it was by relatively fleeting elements. Economic growth is expected to moderate to around 3% in the coming quarters as the effects of fiscal stimulus and inventory movements wear off. We are, however, increasingly more confident in our outlook that the economy can sustain itself and easily avoid the so-called “double-dip” scenario as these aids dissipate.

Solid Finish to the Year

This is the second consecutive positive economic growth after the economy “unofficially” came out of the recession in the third quarter of 2009. The economy grew at a 2.2% rate in the third quarter (originally economic growth in that quarter was reported at 3.5%). The economy had shrunk by 0.7% in the second quarter and 6.4% in the first quarter of 2009. For the full-year 2009, the U.S. GDP contracted 2.4%, the biggest decline in more than 50 years. The economy grew just barely (by 0.4% in 2008) and by 2.1% in 2007.

Inventories Drove the Gain

The strong economic growth in the last three months of 2009 — the fastest in four years — was helped in no small part by slower inventory liquidation, which added almost two-thirds to the quarterly gain. Companies typically cut back production in a downturn as a result of the fall-off in demand and try to meet the weakened demand with existing inventory. We saw this phenomenon of a drawdown of inventories for the last six quarters in a row, the longest such decline since 1948. The reversal of that trend, which appears to have peaked in the fourth quarter of 2009, is a major boost to economic growth, accounting for an estimated 2/3rds of the quarterly gain.

While some folks think lightly of such inventory-led economic growth, it is nothing to scoff at. The slowdown in inventory liquidations at the start of the turnaround, as we saw this quarter, helps bring back production facilities to work, giving a shot in the arm to the rest of the consumer-centric economy. But it is true that we need other sectors to start taking the economic growth baton from inventory liquidation in the coming quarters.

We are seeing some early signs of that recovery. The all-important consumer spending has been up and signs of life are clearly visibile in industrial production numbers. Even the housing sector — the epicenter of this downturn — is showing some signs of economic growth.

We have seen ample evidence of this turnaround in every sector of the economy this earnings season, with company after company coming up with better-than-expected numbers. This morning, Microsoft (MSFT) came out with record revenue and provided a robust outlook, while last night Amazon (AMZN) reported impressive numbers. And Apple (AAPL) and Intel’s (INTC) record numbers just a few days back are still fresh in our memory. And it is not only about the tech sector — we are seeing signs of stability in the banking sector as well, regulatory uncertainties notwithstanding.

All in all, we are increasingly getting more confident in our outlook for sustainable economic growth. We see enough signs of latent strength to help propel this economy on its own once the stimulus starts tapering off in the second half of the year.
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