Q4 GDP (Advance) Research Notes

by Jim Baird on January 28, 2011

The recovery stays the course

The economy grew at a 3.2% annualized pace in the 4th quarter of 2010, resulting in an estimated rate of growth of 2.9% for 2010.  Today’s report on GDP confirmed what we’ve believed for some time: that the economy stepped back from the abyss of a double-dip recession and accelerated in the final quarter of 2010.

Consumers in particular showed signs of emerging from their funk, finding it easier to free up dollars for spending rather than saving.  Although confidence levels remained muted throughout the final months of 2010, consumers proved their resilience and contributed 3% to GDP for the quarter, their highest contribution to growth since the first quarter of 2006.

Today’s report also illustrated again that inflation remains exceptionally low, despite a pickup in growth.  This should continue to provide the Fed adequate cover to keep rates low for some time.

 A number of positive factors supported the positive result: added clarity on the political front, easy monetary policy from the Fed, the extension of the Bush-era tax cuts and a dose of pent up demand all contributed to a recipe for strong consumption growth over the quarter. 

 The potential exists that a prosperous feedback loop could develop if strong consumption continues, encouraging companies to make additional investments to accommodate demand and add to payrolls.  The result would be good for the jobs market and bolster consumer confidence, likely spurring increased spending.   Risks to that scenario exist, but there is a growing sense that the recovery will stay the course.

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