4Q2010 Gross Domestic Product: Second Estimate

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The Bureau of Economic Analysis (BEA) lowered its estimate of the 4Q2010 rate of growth in real U.S. gross domestic product (GDP). The U.S. economy expanded at a 2.8 percent annual rate -- down from the original estimate of 3.2 percent but up from 2.6 percent in 3Q. Personal consumption expenditures (PCE) and net exports (NetX) contributed to growth while private domestic investment (PDI) subtracted from it. Government consumption expenditures were more of a “drag” on growth than originally thought.
 

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The questions raised by last month’s report details remain: First, how could PCE expand if real gross domestic purchases (purchases by U.S. residents of goods and services wherever produced) decreased by 0.6 percent (previously estimated at -0.3 percent) and net exports rose?

Second, a supposed “sharp downturn” in imports contributed to GDP growth for the first time since 2Q2009. But did imports really fall? Not on a nominal basis, but apparently yes on a real basis. According to Census Bureau estimates, imports amounted to $594.3 billion during 3Q2010 and $598.9 billion during 4Q2010 (for a quarterly increase of $4.6 billion); exports were $460.3 billion in 3Q and $481.7 in 4Q (for a quarterly increase of $21.4 billion). Hence, the 3Q trade deficit was $134.0 billion and $117.2 billion in 4Q. Note that those are nominal, not inflation-adjusted, amounts. So, the trade deficit narrowed in 4Q. Apparently, then, the combination of a rise in exports and the 4Q swing in import prices (jumping by 4.4 percent after a 3Q drop of 2.1 percent) was sufficient to reduce the 4Q impact of imports to the point that net exports boosted GDP growth. Such are the vagaries of changes in percentages when computing statistics.

So, our takeaway of the GDP report is that economic activity looks less robust than it did last month; also the 4Q2010 GDP increase occurred primarily because of a combination of suspect consumer-fueled spending and statistical peculiarities, not because of a healthier and sustainable expansion to the means of production.