First Estimate of Fourth Quarter GDP Slightly Below Forecasts

The U.S. real gross domestic product, GDP, grew at an annual rate of 2.8 percent in the fourth quarter of 2011, according to the advance estimate released Friday by the Bureau of Economic Analysis, some 0.2 percent below the consensus forecast of 3 percent. This was one whole percentage point above the third quarter’s increase of 1.8 percent, but this is the first estimate for the fourth quarter and it will be revised in the upcoming weeks.

It should useful here to break the GDP down in to its four basic components and compare each to the previous quarter’s changes. The largest part is produced for personal consumption, and expenditures on this portion rose 2 percent in the fourth quarter, compared to 1.7 percent previously. Breaking it down further, durable goods spending increased 14.8 percent compared to 5.7 percent, and nondurables were up 1.7 percent compared to 0.5 previously.

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Nonresidential fixed investment, which is business spending on equipment, infrastructure, and inventories, plus residential housing, rose 1.7 in the fourth quarter, down from 15.7 previously, reflecting a large decrease in nonresidential structures (-7.2%). Offsetting structures were increases in equipment and software (5.2%) and residential fixed investment (housing) at 10.9 percent.

The third component is consumption expenditures by government. This portion decreased in the fourth quarter by 7.3 percent, compared to a previous increase of 2.1, and the largest part of this can be attributed to a 12.5 percent drop in national defense spending, compared to a 5 percent rise previously. At the same time, nondefense increased by 4.2 percent; it had dropped 3.8 percent in the third quarter. Real state and local spending continued to fall, this time by 2.6 percent, reflecting the budgetary problems in many of the states.

Real exports of goods and services rose by 4.7 percent, constant with the third quarter. Real imports increased by 4.4 percent, up from 1.2 percent.

Current dollar personal income went up by 2.6 percent in the fourth quarter compared to 0.8 percent previously. Less taxes, personal disposable income rose 1.5 percent, out of which 3.5 percent was saved, down 0.2 percent from the third quarter.

The GDP is a constant yardstick used to measure the progress of the economy, and is the market value of all goods and services produced domestically per given period. In an annualized estimate, the U.S. produced an output valued at $15.294 trillion in current dollars in 2011, and this represents an increase over 2010 of 1.7 percent. This increase was boosted by consumption expenditures, exports, and nonresidential fixed investment, but was tempered by decreases in government spending, private inventory investment and exports.

In 2010 the GDP increased more, by 3 percent. This sounds like a slowdown of the economy, but there are mitigating factors. Real GDP takes the price level into consideration, and that increased by a whole percentage point more than it did in 2010. Also, the 2011 estimate was decelerated by a large decrease in government spending, but nongovernment spending is up, and it should be noted that the durable goods numbers are especially promising.

It should also be kept in mind that fourth quarter GDP expansion exceeded the annualized increase by almost a factor of two – this is where the economy is now, and from where it  enters 2012.

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