Gross Domestic Product in the fourth quarter 2011 proved to be the strongest of the year, as the economy expanded at a 2.8% annualized pace. If this estimate holds, fourth quarter growth was also the strongest since the second quarter of 2010, at the back end of the initial growth spurt as the economy emerged from recession.
Today’s GDP data confirms what other economic data had been suggesting for some time: that the economy gathered some momentum in the fourth quarter, but the result was still below what many were hoping for. Given that expectations had been building for growth north of 3% for the quarter, today’s data is mildly disappointing.
We also shouldn’t lose sight of the fact that the preliminary estimate last quarter was also relatively good, before subsequent revisions trimmed nearly three-quarters of a percent for the quarter.
The consumer remains the 800-pound gorilla, accounting for over two-thirds of GDP. Early in the holiday shopping season, there was a sense that consumers were opening their wallets more liberally. With hindsight, consumer spending did accelerate a bit, but at a lackluster 2% rate. One bright spot was in housing, which surged by 10.9% in the quarter.
Broadly, our enthusiasm remains tempered by the fact that the modest pickup in spending was largely funded through a reduction in the savings rate. Such an adjustment can satiate consumers’ spending desires for some time, but cannot be sustained. With holiday cheer no longer stimulating households to spend more, will consumers step back in the quarters ahead? That remains a question and a risk.
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