Economic growth: Gross domestic product rose at 3.2 percent rate by end of 2010

By Neil Irwin
Washington Post Staff Writer
Friday, January 28, 2011; 8:04 PM

The U.S. economic recovery accelerated in the final months of 2010, with the private sector gaining enough strength to supplant government spending as the main engine of growth.

The latest reading on gross domestic product, released Friday, shows that economic expansion is still too slow to bring down unemployment by much. But the recovery is becoming deeper, broader and more durable. The 3.2 percent rate of increase in fourth-quarter GDP, the broadest measure of economic activity, was up from 2.6 percent in the previous quarter.

The most-positive news from Friday's report is that economic growth seems to be putting down roots. In late 2009 and early 2010, the gains in GDP were driven by government spending to stimulate the economy and outlays by business to rebuild depleted inventories - both flash-in-the-pan factors.

By contrast, growth last quarter was driven by American consumers, who spent more; businesses, which invested more; and a much improved balance of trade with other nations. If businesses had not reduced their levels of inventories last quarter, GDP growth would have been more than twice as high. Final sales, which exclude inventory adjustments, rose at a 7.1 percent rate, the strongest showing since 1984.

"It's encouraging that growth is continuing," said David Wyss, chief economist at Standard & Poor's, "and it seems to be becoming more sustainable and more organic growth rather than being forced by the government."

President Obama's chief economist, Austan Goolsbee, called the sixth straight quarter of growth "a further sign that the economy continues to gain momentum." But Goolsbee added that "we have a lot more work to do to accelerate growth so that we are creating the jobs we need."

House Majority Leader Eric Cantor (R-Va.) attributed some of the improved growth to Republican victories in November elections.

"This uptick is no doubt due in part to the certainty that Washington has given the private sector through the recent tax deal and the newly elected House Republican Majority who have pledged to rein in the size and scope of our federal government," Cantor said Friday in his blog. The quarter ended Dec. 31, several days before the new Congress took office.

While much of the congressional debate in the past two years has focused on the administration's efforts to stimulate the economy through government spending, Democrats and Republicans are now debating whether to cut that spending and by how much.

The new GDP figures could provide ammunition to both sides. Republicans can point to the growing role of the private sector to argue that government spending is of limited significance in fostering the recovery. Democrats, for their part, can note that the accelerating growth has made little dent in unemployment and that more needs to be done to address joblessness.

During the second and third quarters of 2010, spending by the federal government increased at about a 9 percent rate. By contrast, in the final quarter, October through December, the federal government's expenditures fell at a 0.2 percent annual rate. State and local governments cut back even more aggressively, at a 0.9 percent rate.

So if there was to be growth in the fourth quarter, it would need to come from the private sector - and it did.

Consumption rose at a 4.4 percent annual rate, the fastest since 2006. There was a particularly strong rise in purchases of cars and trucks.

Business spending on equipment and software rose at a 5.8 percent rate, though that is down from a double-digit rate of growth in the previous two quarters. Even housing, which has been a drag on the economy for most of the past four years, contributed a bit of growth, with residential investment rising at a 3.4 percent rate.

Trade contributed more to GDP than it had in any quarter since 1980. Exports rose at an 8.5 percent annual rate, and imports, which subtract from growth, fell at a 13.6 percent rate. The improving trade balance reversed the trend from the first three quarters of 2010.

The nation's overall economic growth was strong enough to restore the total output to the level it was before the recession began in late 2007. The economy, however, is still producing far below its potential because both population and the efficiency of American workers have increased since 2007.

Because the size of the American labor force is constantly increasing and businesses find ways to operate more efficiently, GDP must rise over time just to keep unemployment unchanged. Economists estimate that the jobless rate will come down only when GDP rises faster than 2.5 percent a year. And the growth must be much faster for unemployment to fall significantly.

"The 3.2 percent growth registered in the last quarter of 2010 would, if sustained over the next year, provide almost no downward push to the unemployment rate," said Josh Bivens, an economist at the Economic Policy Institute.

There is also reason to doubt that the economy will continue accelerating. Consumers could pull back from their active spending at the end of the year in order to get savings rates up, and state and local governments are poised to make deep cuts in spending in the coming months.

"We anticipate a post-holiday pullback in consumer spending, a rise in the personal savings rate, further cuts in spending by state and local municipalities, and a deceleration in business investment in inventories in the current and next quarters," said Bart van Ark, chief economist at the Conference Board, a business research group.

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