SUSTAINED EXPANSION, From Alan D. Levenson, chief economist, T. Rowe Price
In the current environment, the flow of and interplay among recently-released economic data—and the stimulative thrust of monetary and fiscal policy—continue to suggest that the recovery, undisturbed by outside shocks, will soon evolve toward self-sustaining expansion. Business fixed investment advanced at a 2.9% annual rate in the final quarter of 2009, with a 13.3% advance in equipment spending outweighing a 15.4% contraction in outlay for structures. December gains in orders for and shipments of capital goods excluding defense and aircraft (+1.3% and +2.1%, respectively) provide strong quarter end momentum (+11.7% and +14.6% annualized vs. fourth quarter average, respectively) in support of current quarter growth prospects. More fundamentally, historically low levels of plant and equipment outlays relative to depreciation—a legacy of a sharp, cash-conserving suspension of investment plans in response to the seizing up of financial markets and freezing of economic activity in the fall of 2008—sets the stage for a catch-up expansion, and limits the scope for further retrenchment. A sharp slowing in the pace of inventory liquidation accounted for 3.4 percentage points of the fourth quarter advance in real GDP. An anticipated end to de-stocking, as evidenced in January readings from regional surveys of manufacturing conditions, would add a percentage point to current quarter growth. The scope for growth contribution from the accumulation phase may be more limited than during the rapid ending of liquidation, but low levels relative to sales support our expectation that inventory building will add roughly three-quarters of a percentage point over the course of this year, and all but rule out a significant or sustained drag on growth from business inventories in the near term.
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