that economic growth continued to strengthen during the second half of
2010. The annualized fourth-quarter gain of 3.2% is up from increases
of 2.6% and 1.7% in third and second quarters, respectively. The
fourth-quarter increase was slightly below market expectations of a
3.5% increase; however, most of the downward surprise reflected a
greater than expected drawdown in inventories. Excluding inventories,
the so called final sales soared 7.1% in the quarter relative to
expectations of growth closer to 6%. This result suggests strong
momentum in spending going into 2011.
The greater than expected strength in final sales was in large part
the result of strong support from net exports. This component added
3.4 percentage points to the annualized increase in GDP, which was
double the expected boost. The surprise was mainly in the much sharper
drop in imports of 13.6%. The 8.5% rise in exports was more in line
with what the earlier released monthly trade numbers suggested.
Stripping out the effect of both inventories and net exports, the so
called final sales to domestic buyers grew 3.4% in the quarter. This
result was slightly weaker than expected and largely reflected an
unanticipated 0.6% drop in government spending. Some offset was
provided by consumer spending rising by a slightly stronger than
expected 4.4% in the fourth quarter of 2010. Expectations had been for
a 4.0% increase in the quarter. Investment, including both residential
and non-residential, rose 4.2%. We had assumed a 4.4% increase in our
quarterly monitoring.
Annualized growth in the core PCE deflator, the key inflation measure
in the GDP report, rose an expected 0.4% in the fourth quarter, which
is down from increases of 0.5% and 1.0% in third and second quarters,
respectively.
The fourth-quarter GDP report not only showed growth strengthening
relative to the third and second quarters but also indicated a
healthier composition of output. This report bodes well for the solid,
above-average growth to continue in 2011 and consistent with our
projected first-quarter 2011 increase of 3.4%. This pace of growth
offers the prospect of putting greater downward pressure on the
unemployment rate. With a current still high unemployment rate of
9.4%, however, there is the need for above-average growth to be
maintained for a number of years to help absorb individuals who lost
employment during the last recession. Thus, although the Fed will be
encouraged by today's report, it is unlikely to be in any rush to
withdraw monetary stimulus and thus risk growth faltering. Our view
remains that the current very accommodative range of fed funds of 0%
to 0.25% will be maintained into 2012 and that the second round of
quantitative easing will be taken to completion by the middle of this
year.
Source: ActionForex.Com
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