U.S. GDP Edges Up in Fourth Quarter

Written by: Alison Pruitt

The U.S. Department of Commerce’s Bureau of Economic Analysis recently released figures that show that the Gross Domestic Product (GDP) increased in the fourth quarter of 2011. The modest increase demonstrates a slow pace for economic recovery, but it was the fastest growth in more than a year. The overall GDP for 2011 rose 1.7%, compared to a 3.0% increase in 2010.

The Report: The GDP measures the output of goods and services produced by labor and property in the U.S. In the fourth quarter the GDP increased 2.8%, surpassing the third quarter figure of 1.8%.  The GDP saw increases in personal consumption expenditures (PCE), inventory investments, exports, and residential and nonresidential fixed investment.  PCE increased 2.0% in the fourth quarter compared to 1.7% in the third.  Inventory added 1.94% to the fourth-quarter GDP, after a drop of 1.35% in the third quarter. Exports went up 4.7% in both the third and fourth quarters.  The GDP saw declines in federal government expenditures of 7.3% in the fourth quarter, compared to an increase of 2.1% in the third. Local and state government expenditures continued to decline 2.6% in the fourth quarter following a 1.6% drop in the third quarter.  Imports increased 4.4%, making a negative contribution to the U.S. GDP.

The price index for gross domestic purchases increased 0.8% in the fourth quarter, following a 2.9% increase in the third quarter. When food and energy prices are excluded, the price index increased 1.0% in the fourth quarter and 1.8% in the third.  Disposable personal income increased 1.5% in the fourth quarter compared to a meager 0.4% increase in the third quarter.

What It Means to Consumers:  The GDP is the most comprehensive index of economic activity in the U.S. and therefore is an important indicator for the health of the economy.  GDP figures influence many investors’ investment decisions.   Since the report includes information about the health of different sectors of the economy, it also suggests to investors which areas are good investment bets.

Although the overall GDP increase was a positive sign, a large amount of the gain (1.94%) came in the form of increased inventory rather than from PCE (which would reflect an increase in consumer spending).  Therefore much of the rise can be attributed to goods sitting in warehouses rather than actual consumer spending. Excluding inventory investment, the increase was only 0.8%.

Predictions:  The 2.8% increase was below the predictions.  A survey of 79 economists by Bloomberg  ranged from 2.4% to 4.5%, with a median predicted increase of 3.1%.  Analysts agreed that the 2.8% figure was a positive sign, but represents a slow pace of recovery.  The stock market declined in reaction to the news.


U.S. GDP Edges Up in Fourth Quarter

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