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Putting the Growth Back in GDP - Significant Turnaround from 2009 to 2010

Here's what I take away from today's GDP release:

  1. A bit of good news is that the headlines about GDP appear to be more positive than I thought they would be, as they are emphasizing that the economy gained some steam and that consumer spending picked up.
  2. GDP growth in Q4 came in at 3.2 percent, and the market was expecting 3.5 percent. Statistically speaking, there really is no difference between these numbers, so any blather about GDP being weaker than expected is, well, blather.
  3. Looking at 2010 as a whole, GDP grew 2.9 percent. Guess what the Administration forecast for GDP growth for 2010 last January? Three percent. Not too shabby (the private sector forecasters, on average, had about the same expectations, so kudos to them as well.) Before taking out the party supplies and donuts though, recall that just about none of these folks accurately forecast the depth of the recession or that there was going to be a recession at all. When it comes to the delicate art of forecasting, I am reminded of the "broken clock being correct twice a day" metaphor.
  4. Recall that GDP shrank by 2.6 percent in 2009, so we experienced quite a turn around. In fact, we haven't had such a large change in year-to-year growth since 1983. That's a difficult sound bite to convey, so I wonder if many others will pick up on it.
  5. As I mentioned two days ago, forecasts for GDP growth in 2011 have been upgraded recently. In the nearer term, Macroeconomic Advisers is expecting GDP growth of 4.0 percent in 2011 Q1. As I also said two days ago, I am hoping that forecasters become more optimistic about the labor market this year. Again, once we start seeing stronger jobs numbers, I wonder if more optimism will begin to pervade the economic landscape, resulting in stronger growth and yet even more hiring.

Below is additional detail on today's release.

Real GDP climbed a favorable 3.2 percent at an annual rate in the fourth quarter, its sixth straight quarterly advance and a pickup from the 2.6 percent growth in the third quarter.

Figure 1: Real GDP Percent change from prior quarter, annual rate Figure 2: Real Equipment & Software Investment Percent change from prior quarter, annual rate

Consumer spending and business investment in equipment — two key components of GDP — together contributed importantly to overall growth in the fourth quarter as they have since the economy emerged from recession in mid-2009. Other components of domestic final demand, residential and nonresidential construction, contributed as well in the fourth quarter, though there was a small negative contribution from government spending. Some of the increase in final demand was satisfied by lower inventory investment. An improvement in net foreign trade added appreciably to growth.

  • Real consumer spending rose a vigorous 4.4 percent at an annual rate in the fourth quarter, its largest quarterly advance since the first quarter of 2006. Gains were fairly widespread, especially in durable goods, which had a notable lift in purchases of new motor vehicles.
  • Business investment in equipment and software posted its seventh consecutive gain in a row in the fourth quarter. Since the first quarter of 2009, this investment has risen 21.7 percent, led by increases in transportation equipment and information processing and related investment.
  • Residential construction rose 3.4 percent at an annual rate in the fourth quarter after a third quarter drop. While no longer in freefall, the housing sector has yet to turn in at least two quarters of back-to-back growth.
  • Government spending edged down after two quarterly increases. Federal spending declined 0.2 percent at an annual rate in the fourth quarter after two large increases in the preceding two quarters. State and local government spending declined 0.9 percent at an annual rate in the fourth quarter following slight increases in the preceding two quarters.
  • Quarterly contributions to overall growth from inventory investment and net foreign trade tend to fluctuate and can be offsetting. Net foreign trade contributed a sizeable 3.4 percentage points at an annual rate to overall growth in the fourth quarter after subtracting from growth earlier in 2010. Exports jumped 8.5 percent at an annual rate while imports dropped 13.6 percent. Inventory investment subtracted a very large 3.7 percentage points at an annual rate from fourth quarter growth, its first drag on growth since the economy emerged from recession in mid-2009, perhaps, reflecting greater than expected vigor in year-end sales.

The healthy gains in spending and lessening of inventories in late 2010 set the stage for continued favorable growth in early 2011.

Mark Doms, Chief Economist, U.S. Department of Commerce - January 28, 2011

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