Fourth Quarter 2010 Economic Report Card | Nancy D. Sidhu

According to “advance” estimates of the Bureau of Economic Analysis released last week, the U.S. economy grew by +3.2% last quarter (seasonally adjusted annual rate or SAAR).  This marked the sixth consecutive quarterly increase since the recession ended in mid 2009.  Furthermore, the level of economic activity has finally overtaken that recorded in the last quarter of 2007 (the recession officially began in December 2007).

Progress was evident in many sectors of the economy during the fourth quarter:

• Consumer spending for goods and services provided the biggest upward thrust to the economy, adding +3.0 percentage points to last quarter’s growth rate.
• Unusually, imports declined in the fourth quarter.  Because imports enter the GDP calculation with a minus sign, the increase had the effect of boosting the quarterly GDP growth rate by +2.4 percentage points.
• Exports continued to grow rapidly, which contributed +1.0 percentage point to the quarterly growth rate.
• Business spending for new equipment and software also increased and contributed +0.4 percentage points to fourth quarter GDP growth.
• Residential investment spending edged up slightly, boosting overall economic growth by +0.1 percentage point.
• Business investment in nonresidential structures edged up for the first time since 2q2008.  While positive, the impact on quarterly GDP was small, just +0.02 percentage points.

Three sectors made negative contributions to GDP growth last quarter.

• Industrial production grew smartly in recent quarters.  By last fall, stocks seemed high enough to many businesses; so in the 4th quarter, the net rate at which firms were building inventories plunged.  This change counted as the single biggest negative to the economy last quarter, drawing a whopping -3.7 percentage points out of the growth rate.
• State and local government spending decreased, paring -0.1 percentage point from last quarter’s growth rate.
• Federal government spending declined slightly in the fourth quarter, and so deducted -0.01 percentage point from economic growth.

To summarize, U.S. economic growth surged during the fourth quarter.  The real “push” came from the decisions of many households to purchase more goods and services.  In addition, imports declined; investment spending by U.S. businesses rose; and exports increased.  Even so, a few weak spots were visible.  Businesses largely ended their drive to boost inventories, a key source of growth in previous quarters. And state and local governments faced severe budget constraints.  Still, these weren’t enough to derail the economic recovery.

Note:  The BEA called its release an “advance” report because all of the figures are still preliminary.  When preparing its estimates, the BEA did not know for sure what happened to foreign trade, inventories, or construction in December and had to make some assumptions, which may or may not prove correct.  Also, the information on consumer spending during December was still incomplete.  We’ll get a clearer picture of the fourth quarter economy a month from now, but don’t expect the main story line to change significantly.