GDP Growth in the Fourth Quarter 2010

The numbers for real GDP were posted on Friday. The numbers are seasonally adjusted to control for the typical bump in the holiday season. The economy grew at an annual rate of 3.2%.

The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, and nonresidential fixed investment that were partly offset by a negative contribution from private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased.

This is a good sign, the economy is growing (although we would like it to be faster). Perhaps most important is the increase came through consumption, investment, and exports (not government spending). Here is a link to a table that shows us the extent to which consumption, investment, government, and net exports contributed to economic growth. It seems households have increased spending. Looking at the table we need to note:
1) Consumption on durable goods played a key role. Remember this are large ticket items that households normally cut back on when they fear a downturn.
2) Investment is negative, but fixed investment (buying capital equipment) increased.
3) Inventories are negative, but still a good sign for the economy. A decline in inventories implies either (1) firms underestimated demand or (2) had a build up they needed to sell off. If (1) is true then we should see an increase in production to keep off 2011. If (2) is true, then we only hope firms have sold off all their inventories.
4) With the increase in consumption and a decline in inventories many economists are expecting a strong recovery in 2011. If households keep spending, firms have to start producing.
5) Net exports are improving. This will help to close the trade imbalance, and further evidence that a depreciation in the dollar is helping U.S. production.

Overall, this is a good sign. Others are still hoping for more. Here's a piece by Paul Krugman. He's absolutely right, an economy needs to grow at approximately 2.5% to keep from losing more jobs. If we maintain a growth rate of 3.2% it will take nearly 7 years to get back to potential. Right now we are still $1 trillion short of where we should be. Since inventories are playing a large role keeping GDP growth down, I'm not worried about the 3.2%. If households maintain the same level of spending next quarter inventories will stabilize and we could see growth over 4%.