US Fourth-quarter GDP Growth Revised Down to 2.8% from 3.2% Advance Estimate

Location: Toronto
Author: RBC Financial Group Economics Department
Date: Monday, February 28, 2011

The downward revision to fourth-quarter 2010 GDP growth was largely concentrated in the consumer and government sectors. The second estimate of consumer spending growth was lowered to 4.1% from the 4.4% advance estimate, accounting for about 0.2 percentage points (ppt) of the total 0.4 ppt downward revision to GDP growth. A downward revision to government spending to -1.5% from -0.6% accounted for another 0.2 ppt. An upward revision to imports more than offset stronger export growth to leave a modest downward revision to the contribution of net exports to headline GDP growth. Some offset was provided by an upward revision to business investment to a 5.3% rate from the 4.4% advance estimate, however.

Annualized fourth-quarter 2010 growth in the core PCE deflator, the key inflation measure in the GDP report, was revised up to 0.5% from the advance 0.4% estimate, following increases of 0.5% and 1.0% in third and second quarters, respectively.

While tweaking the details, today’s report left the fairly healthy composition of fourth-quarter GDP growth largely unchanged. A solid contribution to growth from net trade largely reflected falling imports and was more than offset by a sharp slowing in the pace of inventory accumulation; however, the increase in consumption of 4.1%, while modestly lower than the previously estimated 4.4%, still marked the strongest pace of growth since the fourth quarter of 2006. The so called final sales to domestic buyers, which exclude both the volatile net trade and inventory categories, posted a solid 3.1% increase (previously 3.4%). Looking ahead to the first quarter of 2011, early indicators are consistent with our expectation that growth in consumer spending slowed to a 3.2% pace from the surge in the fourth quarter of 2010, but, with indications of a rebound in inventories, we expect a modest increase in first-quarter 2011 GDP growth to a 3.4% pace, above the revised fourth-quarter 2010 increase.

We continue to expect a pick-up in full-year GDP growth to a 3.4% pace from the 2.8% 2010 increase; however, notwithstanding the recent outsized two-month drop in the unemployment rate to 9.0% in January 2011 from 9.8% in November 2010, it will still take sustained above-average growth for a number of years to absorb individuals who lost employment during the recession. As a result, while the rise in fourth-quarter 2010 output, along with broadly positive early indications for the first quarter of 2011, is encouraging, we continue to expect that the fed funds rate will remain in its current 0% to 0.25% range into 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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