Before you bust out your dancing shoes and do the Cha-cha-cha, realize that overall, the economy contracted by 2.4% in 2009. I don’t want to be the bearer of bad news but the contraction the US economy experienced last year was the worst since World War II! Still, the upside surprise proved to be a boon for the dollar, as it encouraged currency traders to buy it up against most major currencies.
Digging deeper, components of the fourth quarter GDP showed that consumer spending, which accounts for two-thirds of all economic activity, was actually on the low end during the period. Compared to the 2.8% rise seen in the third quarter, consumer spending printed a moderated 2% uptick during the succeeding quarter. Aside from that, business investment fell 17.9% in 2009, marking its steepest decline since 1942.
What contributed mostly to growth was the increase in manufacturing activity. Manufacturers stepped up their production during the last three months of 2009 in order to replenish their inventories. Stockpiles shrank by only $33.5 billion during the fourth quarter, a far cry from the $100 billion quarterly decline in inventories seen during the first three quarters of 2009.
What does this mean, now that GDP rose even more than what initially expected? Does this spell an end of quantitative easing measures? Or… a rate hike? Gasp!
In my blog last week, I talked about how there was dissension amongst Fed officials. Let me remind you what Thomas Hoenig, a.k.a “The Lone Fed Wolf” said last week. According to Hoenig, with US GDP rising quickly in the fourth quarter, this may lead to a sharp rise in inflation. In order to avoid such scenario, Hoenig said that the FOMC should reconsider its commitment to keep rates for an “extended period.”