The Bureau of Economic Analysis (BEA) released the final estimate of real GDP growth for the fourth quarter of 2010, revising growth up to a seasonally adjusted annual rate of 3.1 percent. This is a welcome acceleration from third quarter growth of 2.6 percent and the composition of growth is encouraging, but the uncertainty surrounding the next few quarters is unusually high given current events.

First the good news. Fourth quarter GDP growth of 3.1 percent and accelerating is the trajectory we need to begin to bring the unemployment rate down, a development that will contribute to even stronger growth. And the composition of growth was solid as personal consumption expenditures (PCE), the work horse of GDP growth accelerated to 4.0 percent growth from 2.4 percent last quarter. Residential fixed investment (RFI) and exports accelerated, while nonresidential fixed investment posted solid growth. A sharp decline in imports further boosted growth, but the positive contribution of net exports was more than offset by the impact of a sharp deceleration in inventory investment. Overall, growth of real final sales of domestic product (i.e., GDP less inventory investment) was 6.7 percent, indicating solid underlying demand.

Despite these encouraging fundamentals, the potential for setbacks is large. The tragic events extracting such a human toll in Japan are already affecting the global economy, as the auto industry and other sectors that rely on Japanese exports are beginning to experience supply disruptions and production slowdowns. At the same time, futures contracts for oil delivered through 2011 are hovering above $100 per barrel, drifting lower only in the second half of 2012. This is still below the price spike that peaked in the summer of 2008, but hardly good news for growth. Add to this that Portugal is in the process of demonstrating that the European Sovereign Debt Crisis (ESDC) is at best contained, but quite possibly just postponed, and at this point not really solved.

These headwinds represent a portfolio of problems outside our control that have the potential not to derail but to undermine and postpone a more robust economic recovery. Today’s GDP growth numbers put the economic recovery on solid footing, but the road ahead has some real dangers.