March 26, 2017

US Economy Expands in 4th Quarter

During the 4th quarter of 2010, the US economy grew at an annual rate of 3.2%, according to an advanced estimate of the gross domestic product released today [.pdf] from the Bureau of Economic Analysis (revised to 3.1% on Mar. 25). GDP growth during the 4th quarter grew more than the previous two quarters, when overall economic output grew at a 1.7% rate in the 2nd quarter and a 2.6% rate in the 3rd quarter. While the economy improved more compared to the previous two quarters, the 4th quarter of 2009 recorded a GDP growth of 5.0%. Still, there has been positive GDP growth for six consecutive quarters, following four negative quarters from the 3rd quarter of 2008 to the 2nd quarter of 2009.

Ever since the 2nd quarter of 1947, when GDP record keeping began, there had never been four straight quarters of negative GDP growth prior to this recent streak. This fact shows how the great recession brought the US economy into uncharted territory. Since 1947, GDP growth averages 3.3% [xls]. The 4th quarter pace nearly met the typical growth rate for a number of reasons, but consumer spending during the holiday season is a primary reason for the 4th quarter increase.

Personal consumption expenditures grew at a 4.4% rate in the 4th quarter, which is the greatest increase of consumer spending since the 1st quarter of 2006. Durable goods grew 21.6% and led the boost in consumer spending. Nondurable goods recorded a more modest growth rate of 5%. Nondurable goods refer to items for immediate use, such as gas, food, or clothing, while durable goods refer furniture, vehicles, or recreational goods. Consumer services grew at a 1.7% rate.

In addition to an increase in consumer spending during the 4th quarter, there was also an improvement in international trade that contributed to the 4th quarter growth. Not only did exports increase 8.5%, but imports decreased 13.6% as well. Another factor contributing to an improvement in the GDP was an increase in nonresidential investment, particularly among technical equipment and software.

Despite these contributions to the growth of the 4th quarter, many economists expected GDP growth to be greater. A CNN poll of economists projected a 3.5% growth rate for the 4th quarter. What’s more, these economists correctly estimated consumer spending would fuel the rise, but consumer spending was greater than the projection of 4.0%, yet the overall growth rate still lagged. This means there must have been declines in other sectors of the economy that offset the increases, as the following factors show.

Investments in private domestic sectors declined a whopping 22.5%, which is the most since the beginning of 2009, when the recession was in full effect. Another factor that offset growth were decreases in not only federal government expenditures, but also state and local government expenditures. In 2009, federal government expenditures accounted for 25% of the GDP, while state and local government expenditures accounted for 9%. Since government spending makes up a third of economic activity, these 4th quarter decreases certainly influenced the growth rate from meeting expectations.

Lastly, a full recovery of the US economy depends on more than an acceleration of consumer spending. The unemployment rate, which has been above 9% for twenty consecutive months, must improve, as well as the stagnant housing market that hit record lows throughout 2010. Without these two vital sectors performing better, a full recovery of the economy will require years, rather than several months.

Comments

  1. Nice article, you packed a lot of information into this one. Just wanted to note that these gdp growth rates are annualized numbers and some people might be confused. Keep up the solid work and “thumbs up” on the new layout.

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