US GDP Growth Revised Marginally Higher

 

Location: Toronto
Author: RBC Financial Group Economics Department
Date: Thursday, December 23, 2010

The third, and final, estimate of third-quarter 2010 GDP saw the growth rate revised up once again although by only a marginal 0.1 percentage point (pp) to 2.6% from the second, or preliminary, estimate of 2.5%. Growth in the third quarter was initially estimated at 2.0% in the advance report. Expectations were for a more significant upward revision to 2.8%. The revised third-quarter increase represents a significant strengthening from a second-quarter GDP increase of 1.7%. Growth in the economy started the year rising by a generally robust 3.7%.

Expectations for an upward revision to third-quarter growth were largely based on indications of inventories coming in stronger than had been assumed by the Bureau of Economic Analysis (BEA) in compiling the preliminary GDP add-up. In the event, inventories were revised higher and added an additional 0.3 pp to third-quarter growth. Net exports added a further 0.1 pp on the back of an upward revision to export growth to 6.8% from a previously estimated 6.3%. The main offset was a larger than expected downward revision to growth in consumer spending to 2.4% from a previously estimated 2.8% because spending on services was reduced. This result lowered the contribution from consumer spending to GDP growth by 0.3 pp.

Annualized quarterly growth in the third-quarter core PCE deflator, the key inflation measure in the GDP report, was unexpectedly revised down to 0.5% from a previously estimated 0.8%. This result represents a continued slide from a 1.0% increase in the second quarter and an average increase of 1.5% in 2009.

Although today’s report surprised on the downside, it provides a further piece of evidence that the weakness mid-year 2010 was largely temporary with GDP growth rebounding to 2.6% in the third quarter from the disappointing 1.7% gain in the second quarter. We are currently monitoring growth of 3.1% in the final quarter of 2010. Both the central bank and the administration have opted to provide additional monetary and fiscal stimulus for the last couple of months in an effort to boost growth further until the end of 2011. These actions are expected to contribute to raising growth in 2011 to 3.9% on a fourth quarter-over-fourth quarter basis (3.3% on an annual average basis). With inflation remaining quiescent, we assume that the central bank will maintain these highly stimulative conditions in the near term. We do not expect any hike in fed funds relative to its current range of 0% to 0.25% until early 2012.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.

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