4th Quarter Shows Strong Demand Growth

Revised GDP numbers for the fourth quarter of 2010 were released by the Bureau of Economic Analysis today, showing the economy grew at an annual rate of 2.8 percent, slightly lower than the previous estimate of 3.2 percent. That’s not great news, but buried in the data are continued signs that demand is strengthening.

For one, personal consumption fueled the vast majority of last quarter’s growth. Consumption contributed 2.88 percent to GDP growth, its highest rate since early 2006, and more than twice as much as it did in the third quarter. This consumption-fueled expansion is encouraging, and follows up on the strengthening sales and higher profits businesses started to see last year.

Strengthening domestic consumption was accompanied by increased imports from abroad, which were strongly positive after a year of relatively weak demand for foreign-made products. Of course, some economists may (based on false premises) bemoan the upswing in imports, but it indicates Americans are much more in a mood to spend than they have been.

The numbers aren’t all rosy, though. While demand indicators appear to be strengthening, investment is weak. Private investment actually decreased by a little under 6 percent (not annualized) last quarter after over a year of steady increases. Investment, unlike many other parts of the economy, has yet to return to anywhere near its pre-recession high, and this new decrease rolls back some of the hard-won gains that have occurred since it reached bottom in mid-2009.

Overall, Q4 2010 marks the steady increase in consumers’ propensity to spend and continued gradual recovery for American businesses. Let’s hope it continues.