Beneath the Headline US GDP Number: The Sources of 2.8% Growth

February 1st, 2012 by

For Wall Street traders, the real excitement came when they got their first glimpse of the GDP data for the fourth quarter of 2011 and learned that the Commerce Department estimates that GDP grew at an annual pace of 2.8%, up from 1.8% in the third quarter.

That figure, which represents the value of all goods and services produced during the period, fell slightly short of what economists had been anticipating. But for longer-term investors and economists, the source of that growth may be just as interesting as its magnitude. As the chart below shows, gains in inventory levels and consumer spending accounted for the vast majority of the gains, raising some interesting questions for future growth. While personal spending routinely accounts for a relatively sizeable portion of GDP, the contribution from inventories is more uneven, and this is the first period since mid-2009 that a rise in inventories has been responsible for a significant portion of any GDP gains. (Indeed, as the chart below demonstrates, the reverse has more often been true of late.)


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Economists honed in on the slowdown in fixed investment spending during the fourth quarter. “After booming for almost a year, it flatlined in the fourth quarter,” said Cary Leahey, an economist at Decision Economics in New York. “That could be related to the expiration of certain tax incentives for business investment, but we don’t know for sure.” That figure will be closely watched, as speculation remains that might augur a weaker first-quarter GDP figure than otherwise expected.

Volatility in US GDP growth has subsided over the last two years, however. As the chart below shows, GDP growth rates tended to fluctuate significantly more prior to the mid-1980s. Since then, however, growth rates have moved within a narrower band and volatility has been significantly reduced. The sole exception to that rule, obviously, was during the recession of 2008 and 2009.


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In the context of lower volatility, with GDP growth varying less from one quarter to the next, even small changes in personal consumption or investment spending can have a relatively significant impact on the aggregate level of growth. That’s another reason to pay close attention to the breakdown and to the factors responsible for each GDP report.

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