US GDP: The US economy is firing - but a few cylinders short. The 3.2 per cent advance estimate for annualized fourth-quarter 2010 GDP growth looks healthy enough. But there are underlying quirks that raise questions, and big revisions are likely. After all the fiscal and monetary lubrication, it's odd that the economic engine isn't accelerating faster.
One of the two big quirks relates to inventories. In the third quarter last year, the US economy experienced a big inventory build-up. That suggested that sustainable growth was less robust than indicated by the 2.6 per cent annualized headline figure. In the last quarter of 2010, inventories increased only marginally. Had the build-up from the third quarter continued, reported growth would have been nearly 4 percentage points higher in the fourth quarter.
That effect may have depressed the latest growth figure. But the other oddity, an increase in exports and a decline in imports, worked the other way. The smaller trade gap made fourth-quarter GDP growth more than 3 percentage points higher than it would have been based on the trade gap in the previous three months. Strangely, no equivalent improvement in America's trade position is evident from monthly statistics.
With two such significant anomalies, this advance GDP reading may be even more than usually subject to revision. Less open to adjustment is the 0.5 percentage point decline in the savings rate to 5.4 per cent. That's one sign that the economy, while growing for now, remains imbalanced. In short, a consistent pattern of strengthening growth is not yet showing in GDP figures. Given the heavy government spending that is expected to bring a $1.5-trillion budget deficit in the year to September 2011, combined with low policy interest rates and the Federal Reserve's big Treasury bond purchase programs, it's surprising the US economy isn't gathering speed more smoothly. That may yet start happening. In the meantime, US investors and consumers should make the most of the current period of apparently healthy growth while it lasts.