Fourth Quarter 2010 U.S. GDP

The U.S. Commerce Department reported this morning that gross domestic product (GDP) expanded 3.2% in the fourth quarter of 2010.  This result compares to an expected figure of 3.5% growth by a consensus of economists.

Analysis: I consider this result to be positive.  In the first quarter of 2010 GDP grew by 3.7% but most of that growth was from businesses investing in inventories in anticipation of consumer demand that just didn’t materialize.  Second quarter GDP reflected that and the economy only expanded 1.7%.  In part that quarter was negatively affected by the “flash crash” and the unfolding Eurozone debt crisis.  Only in the third quarter, with GDP growth of 2.6%, did the economy seem to be gaining its footing.  But that level of growth was too low to excite.  Now we have a real, solid, and most importantly, normal GDP number!

The breakdown of GDP is: Consumer spending + Investment by businesses + Government spending + Xports, net

Fourth quarter growth of…

• consumer spending = up 4.4%
• investment by business = down 3.7%
• government spending = down 0.2%
• exports – imports = up 3.4%

As you can see the most important number, consumer spending, which makes up 70% of the U.S. economy expanded very robustly in the fourth quarter of 2010.  In fact, that result is the strongest since 2006.

Business inventories fell, but this is a good thing.  Why?  In the third quarter businesses invested billions of dollars into their inventory in anticipation of consumer spending during the holiday season.  If consumers had not bought those goods then there would have been a massive overhang of inventory.  Then businesses would have had to discount their prices tremendously.  That didn’t happen.  The reason is that the U.S. consumer showed up.  So a decline in inventories represents a rationalization of the U.S. economy toward a position of greater equilibrium.

Government spending fell, too.  I consider this to be a good thing.  In classic economic theory in a recession the government is supposed to increase spending to take up the slack from other areas of the economy.  But this is unsustainable because it relies upon borrowing by government.  That borrowing is exactly the same as trying to extend your economic means as a consumer by using credit cards in slack economic times.  Eventually you have to pay it back.  So less government spending again means that the economy is becoming more normal.

Net exports up is a shocker.  The U.S. has long been a debtor nation on many fronts and one of them is the persistent trade deficit.  In the fourth quarter the U.S. actually exported more than it imported.  I don’t feel this is a long-term, sustainable trend, but it represents a nice surprise.

In conclusion, I like these numbers.  They show a strengthening U.S. economy and one that appears to be back on the road toward normalcy.

Importance grade: 10; enough said.

Jason