Friday, January 28, 2011


That's a B+ grade point average; its the limit imposed by several western states on the alcohol content on the beer that can be sold in grocery stores; and its the BEA's advance estimate of 4th quarter 2010 real GDP growth.  3.2 is hard to get excited about (though it could be worse).

Real GDP is finally back above its pre-recession (Q4 2007) peak.  However, while growth has accelerated from the 2nd and 3rd quarters, is still not fast enough to close the "output gap" anytime soon.  The red line below is real GDP (quarterly, at annual rates) and the blue line represents what would have happened if the economy continued to grow at 2.5% (roughly the average rate for 2002-07) after the end of 2007.
If real GDP grows at 3.2%, the red line catches up to the blue line in about 10 years.

Consumption grew at a 4.4% pace, and the rate of increase for durable goods purchases was 21.6%.   Exports increased at a rate of 8.5% and imports fell 13.6%, bringing the trade deficit down to 3.3% of GDP.

The main source of disappointment would be investment: nonresidential fixed investment increased at a 4.4% rate.  Since investment is the most volatile component of GDP, one would expect it to grow rapidly during the recovery (just as it shrank rapidly during the recession).  This is particularly true given how well corporate profits are doing. 

The overall investment component shrank at a 22.5% rate, because inventory accumulation slowed dramatically (from a $138.6bn rate in the third quarter to $5.2bn in the fourth). That means that growth is no longer dependent on inventory restocking.  This had a fairly big effect on the overall number - if inventory accumulation had stayed the same, growth would have been 6.9%.  So one could argue that things are perhaps a little better than the headline number suggests.

Government was also a drag on growth as decreases in state and local government and federal defense purchases outweighed a federal non-defense increase.

For the full year 2010, real GDP growth was 2.9% (after falling 2.6% in 2009).  The GDP deflator rose by 1%.

In the first quarter of 2011, disposable income will get a boost from the temporary payroll tax cut agreed to in December, which should help.
That's just the first of several estimates - the updated "second estimate" is due Feb. 25.