Fourth Quarter Real GDP Advance Estimate: Solid Improvement

The Bureau of Economic Analysis (BEA) released its “advance” estimate for real GDP growth in the fourth quarter today. The 3.2 percent annual rate of increase is up from 2.6 percent in the third quarter. The BEA emphasizes that the advance estimates are based on source data that is incomplete or subject to revision. The average absolute value of revision to the advance estimates for real GDP growth is 0.5 percentage points. Allowing for offsetting errors, the average is 0.1 percentage points. Revisions to third quarter GDP growth raised that rate from 2.0 percent to 2.5 percent to the final 2.6 percent rate. Assuming no major negative revision next month this represents solid improvement in the trajectory of growth in the economy.

The composition of growth is also good news. Personal consumption expenditures (PCE), typically two thirds of GDP, posted strong growth of 4.4 percent, accelerating from 2.4 percent last quarter. Exports and nonresidential fixed investment increased their pace while residential fixed investment (RFI), home building’s part of GDP, grew at a 3.4 percent annual rate, recovering from a disappointing contraction in the third quarter. We expect RFI growth to continue and accelerate in coming quarters as overall growth accelerates along with the pace of employment growth, and a slower but steady reduction in the unemployment rate.

Today’s report should finally put to rest fears of a double dip recession, as well as bolster confidence as the economy gains momentum through 2011 and beyond. Today’s above trend 3.2 percent growth rate is a good start, but it will still take a sustained period of even faster growth to close the sizable gap that has opened up between potential and actual GDP since the onset of the Great Recession.



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